Federal Register, Volume 81 Issue 250 (Thursday, December 29, 2016)

[Federal Register Volume 81, Number 250 (Thursday, December 29, 2016)]
[Rules and Regulations]
[Pages 96242-96301]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30284]

[[Page 96241]]

Vol. 81

Thursday,

No. 250

December 29, 2016

Part III

Federal Housing Finance Agency

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12 CFR Part 1282

Enterprise Duty To Serve Underserved Markets; Final Rule

Federal Register / Vol. 81 , No. 250 / Thursday, December 29, 2016 /
Rules and Regulations

[[Page 96242]]

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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1282

RIN 2590-AA27

Enterprise Duty To Serve Underserved Markets

AGENCY: Federal Housing Finance Agency.

ACTION: Final rule.

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SUMMARY: The Housing and Economic Recovery Act of 2008 (HERA) amended
the Federal Housing Enterprises Financial Safety and Soundness Act of
1992 (Safety and Soundness Act) to establish a duty for the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac) (collectively, the Enterprises) to
serve three specified underserved markets--manufactured housing,
affordable housing preservation, and rural markets--in order to
increase the liquidity of mortgage investments and improve the
distribution of investment capital available for mortgage financing for
very low-, low-, and moderate-income families in those markets. The
Federal Housing Finance Agency (FHFA) is issuing this final rule which
specifies the scope of Enterprise activities that are eligible to
receive Duty to Serve credit. These activities generally are those that
facilitate a secondary market for mortgages related to: Manufactured
homes titled as real property or personal property; blanket loans for
certain categories of manufactured housing communities; preserving the
affordability of housing for renters and homebuyers; and housing in
rural markets. The final rule provides a framework for FHFA's method
for evaluating and rating the Enterprises' compliance with the Duty to
Serve each underserved market.

DATES: The final rule is effective January 30, 2017.

FOR FURTHER INFORMATION CONTACT: Jim Gray, Manager, Office of Housing
and Community Investment, (202) 649-3124; Matt Douglas, Senior Policy
Analyst, Office of Housing and Community Investment, (202) 649-3328;
Miriam Smolen, Associate General Counsel, Office of General Counsel,
(202) 649-3182; or Sharon Like, Managing Associate General Counsel,
Office of General Counsel, (202) 649-3057. These are not toll-free
numbers. The mailing address for each contact is: Federal Housing
Finance Agency, 400 7th Street SW., Washington, DC 20219. The telephone
number for the Telecommunications Device for the Hearing Impaired is
(800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory Background

The Safety and Soundness Act provides generally that the
Enterprises ``have an affirmative obligation to facilitate the
financing of affordable housing for low- and moderate-income
families.'' \1\ Section 1129 of HERA amended section 1335 of the Safety
and Soundness Act to establish a duty for the Enterprises to serve
three specified underserved markets, to increase the liquidity of
mortgage investments and improve the distribution of investment capital
available for mortgage financing for certain categories of borrowers in
those markets.\2\ Specifically, the Enterprises are required to provide
leadership in developing loan products and flexible underwriting
guidelines to facilitate a secondary market for mortgages on housing
for very low-, low-, and moderate-income families for manufactured
housing, affordable housing preservation, and rural markets.\3\ In
addition, section 1335(d)(1) requires FHFA to establish, by regulation,
a method for evaluating and rating the Enterprises' compliance with the
Duty to Serve underserved markets.\4\ FHFA is required to separately
evaluate each Enterprise's compliance with respect to each underserved
market, taking into consideration the following:
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\1\ 12 U.S.C. 4501(7).
\2\ 12 U.S.C. 4565.
\3\ 12 U.S.C. 4565(a). The terms ``very low-income,'' ``low-
income,'' and ``moderate-income'' are defined in 12 U.S.C. 4502.
\4\ 12 U.S.C. 4565(d)(1).
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(i) The Enterprise's development of loan products, more flexible
underwriting guidelines, and other innovative approaches to providing
financing to each of the underserved markets (hereafter, the ``loan
product evaluation area'');
(ii) The extent of the Enterprise's outreach to qualified loan
sellers and other market participants in each of the underserved
markets (hereafter, the ``outreach evaluation area'');
(iii) The volume of loans purchased by the Enterprise in each
underserved market relative to the market opportunities available to
the Enterprise, except that the Director shall not establish specific
quantitative targets or evaluate the Enterprise based solely on the
volume of loans purchased (hereafter, the ``loan purchase evaluation
area''); and
(iv) The amount of investments and grants by the Enterprise in
projects which assist in meeting the needs of the underserved markets
(hereafter, the ``investments and grants evaluation area'').\5\
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\5\ 12 U.S.C. 4565(d)(2).
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The Duty to Serve provisions and issues considered are discussed
further below.

B. Conservatorship

On September 6, 2008 the Director of FHFA appointed FHFA as
conservator of the Enterprises in accordance with the Safety and
Soundness Act to maintain the Enterprises in a safe and sound financial
condition and to help assure performance of their public mission. Since
the establishment of FHFA as conservator, the Enterprises have returned
to profitability. The U.S. Department of the Treasury (Treasury
Department) has provided essential financial commitments of taxpayer
funding under Senior Preferred Stock Purchase Agreements (PSPAs).
Fannie Mae and Freddie Mac have drawn a combined total of $187.5
billion in taxpayer support under the PSPAs to date. Through September
30, 2016, the Enterprises have paid the Treasury Department a total of
$250.5 billion in dividends on senior preferred stock. Under the
provisions of the PSPAs, the Enterprises' dividend payments do not
offset the amounts drawn from the Treasury Department.
While the Enterprises are in conservatorships, all of their
activities are subject to FHFA review and approval. FHFA has delegated
day-to-day management of the Enterprises to their senior management and
boards of directors. In managing the conservatorships, FHFA sets the
strategic direction of the Enterprises, approves Enterprise actions as
deemed appropriate by FHFA, and oversees and monitors Enterprise
activities.
The law also requires and FHFA expects the Enterprises to continue
to fulfill their core statutory purposes while they are in
conservatorship, which include their support for affordable housing and
underserved markets. Consistent with the conservatorships, Enterprise
support for affordable housing and underserved markets must be
accomplished within the confines of safety and soundness and the goals
of conservatorship.

C. Regulatory History

Prior to issuing this final rule, FHFA engaged in a number of
rulemaking activities to establish its regulatory expectations for the
Enterprises' Duty to

[[Page 96243]]

Serve obligations and FHFA's evaluation process for those activities.
These prior regulatory actions are described below.
1. Advance Notice of Proposed Rulemaking
Rulemaking for the Duty to Serve commenced in August 2009 with
FHFA's publication in the Federal Register of an Advance Notice of
Proposed Rulemaking (ANPR) on the Enterprise Duty to Serve underserved
markets.\6\ FHFA received 100 comment letters in response to the ANPR.
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\6\ See 74 FR 38572 (Aug. 4, 2009).
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2. 2010 Duty To Serve Proposed Rule
After reviewing the comment letters on the ANPR, FHFA published in
the Federal Register on June 7, 2010 a proposed rule on the Duty to
Serve.\7\ The 45-day public comment period for the proposed rule closed
on July 22, 2010. FHFA received 4,019 comments on the proposed rule.
Commenters included individuals, trade associations, policy and housing
advocacy groups, nonprofit organizations, corporations, government
entities, management companies, homeowners' associations, developers,
lenders, a legal services group, Members of Congress, and both
Enterprises. No final Duty to Serve rule was issued after the close of
the comment period in 2010.
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\7\ See 75 FR 32099 (June 7, 2010).
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3. 2015 Duty To Serve Proposed Rule
FHFA began work to develop a new Duty to Serve proposed rule in
2014, taking into consideration the comments received on the 2010 Duty
to Serve proposed rule and subsequent input from diverse stakeholder
groups. The comments and input received and FHFA's intervening years of
experience with the Enterprises and their operations in the underserved
markets suggested a different approach, sufficiently so that further
notice and comment was necessary through issuance of a new proposed
rule. Accordingly, FHFA published in the Federal Register on December
18, 2015 a second proposed rule on the Enterprises' Duty to Serve
requirements.\8\ The 90-day public comment period for the proposed rule
closed on March 17, 2016.
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\8\ See 80 FR 79181 (Dec. 18, 2015).
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FHFA received 1,567 comments on the 2015 proposed rule, including
from the following stakeholder groups:
Individuals, including owners of manufactured homes;
Trade associations, including manufactured housing trade
organizations, and lender, builder and energy efficiency trade
organizations;
Nonprofit lenders and developers, including loan funds,
land trusts, community development financial institutions,
intermediaries, and organizations focused on preservation and energy
conservation;
Policy and housing advocacy organizations, including civil
rights organizations, fair housing organizations, and national and
state consumer law organizations;
Commercial enterprises including Low-Income Housing Tax
Credit investors, manufactured housing construction companies and
developers, and energy efficiency companies;
Government entities, including federal, state, and local
government entities and state and local housing finance agencies;
Members of Congress;
Academicians, including university professors; and
Fannie Mae and Freddie Mac.
A number of commenters addressed one or more of the 79 specific
requests for comment posed in the SUPPLEMENTARY INFORMATION to the
proposed rule. Responses to the questions came from a diversity of
stakeholders reflecting a wide range of opinions. FHFA appreciates the
efforts made by commenters to respond to the questions, and FHFA
considered these comments in developing the final rule. Some questions
were answered by a large number of commenters, while other questions
were not addressed by commenters at all. Some commenters offered a
single answer to multiple questions. As a result, FHFA has incorporated
applicable responses to the questions into the discussion below of
comments on particular issues.
FHFA also held five roundtable discussions with commenters
representing a diversity of interests on issues pertaining to the
rulemaking.\9\ The purpose of the roundtable discussions was to provide
the commenters with an opportunity to elaborate on their comment
letters, express their views on the comment letters submitted by
others, and provide responses to FHFA questions seeking clarifications
on their comment letters. Each roundtable discussion focused on
specific groups of stakeholders:
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\9\ Summaries of each of these meetings are available on FHFA's
Web site at: https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Comment-List.aspx?RuleID=543.
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On April 19, 2016, FHFA met with rural housing
stakeholders to discuss how the term ``rural area'' should be defined,
high-needs rural areas, and other related issues.
On April 20, 2016, FHFA met with advocates for consumers,
civil rights, energy efficiency, and affordable housing to discuss
manufactured housing, energy efficiency, Low-Income Housing Tax
Credits, and other strategies to preserve affordable housing.
On April 25, 2016, FHFA met with organizations
representing the mortgage finance and insurance industries to discuss
gaps in underserved market segments that are within acceptable credit
risk tolerances for lenders, insurance companies, and investors, and
other related issues.
On April 26, 2016, FHFA met with organizations
representing manufactured housing industry participants to discuss
tenant protections in manufactured housing communities, manufactured
housing units titled as real estate or personal property, and other
related issues.
On May 2, 2016, FHFA held a conference call with rural
housing stakeholders who were unable to participate in the April 19
meeting described above.

II. Duty To Serve Underserved Markets

A. Implementing the Duty To Serve

The final rule implements the Enterprises' statutory Duty to Serve
very low-, low-, and moderate-income families in the underserved
markets of manufactured housing, affordable housing preservation, and
rural housing. In doing so, the final rule creates two complementary
processes for the Enterprises to plan for their Duty to Serve
activities and for FHFA to annually evaluate each Enterprise's
compliance with its Duty to Serve obligations. Under the final rule,
each Enterprise must prepare an Underserved Markets Plan (Plan)
describing the specific activities and objectives it will undertake to
fulfill its Duty to Serve obligations in each underserved market over a
three-year period. The Plan process as outlined in the final rule does
not make any specific activity mandatory. Instead, the final rule
establishes a set of procedures for the Enterprises to consider a range
of activities for inclusion in their Plans and incentives for the
Enterprises to include impactful activities in their Plans. In addition
to the provisions described in the final rule, and in order to address
implementation and operational questions that may arise, FHFA intends
to release guidance from time to time as the Enterprises develop and
execute their Plans.
The final rule also establishes an evaluation and ratings process
for FHFA

[[Page 96244]]

to assess the Enterprises' performance in fulfilling their Plans in
each underserved market. As part of this process, FHFA will prepare
Evaluation Guidance which, together with the Enterprises' Plans, will
be the basis for FHFA's evaluations and ratings. The public will have
an opportunity to provide input on each Enterprise's draft Plan as well
as FHFA's draft Evaluation Guidance. FHFA will annually assign each
Enterprise a rating for each of the three underserved markets in its
Plan, and FHFA will publicly report on its basis for assigning each
rating. As part of these annual evaluations, FHFA will also monitor the
Enterprises' Duty to Serve activities on an ongoing basis.
All activities that an Enterprise undertakes in furtherance of its
Duty to Serve must be consistent with its charter act,\10\ as well as
with all other applicable federal and state laws. Nothing in the final
rule authorizes or requires an Enterprise to engage in any activity
that would be otherwise inconsistent with its charter or the Safety and
Soundness Act, or prohibits an Enterprise from engaging in any
activity. Rather, the final rule specifies the scope of Enterprise
activities that are eligible to receive Duty to Serve credit, and
provides a framework for evaluating the Enterprises' performance.
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\10\ See Federal National Mortgage Association Charter Act sec.
301, 12 U.S.C. 1716, et seq., and Federal Home Loan Mortgage
Corporation Act sec. 301, 12 U.S.C. 1451 note, et seq. The
Enterprises' public purposes include a broad obligation to serve
lower- and moderate-income borrowers.
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Consistent with safety and soundness and consistent with the
conservatorships, FHFA expects the Enterprises to show tangible results
in each underserved market and to effectively facilitate mortgage
lending to very low-, low-, and moderate-income families in each
underserved market. Consistent with their charters, the Enterprises
should expect mortgage purchases and activities pursuant to the Duty to
Serve to earn a reasonable economic return, which may be less than the
return earned on activities that do not serve these underserved
markets.\11\
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\11\ See 12 U.S.C. 4513(a)(1)(B)(ii).
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B. Underserved Markets Plans

The below section sets out the final rule's requirements for each
Enterprise to submit a Plan that will describe the activities and
objectives the Enterprise will undertake for Duty to Serve credit. Each
Enterprise must not only describe in its Plan the activities it intends
to engage in, but also why it decided not to include certain other
activities in its Plan.
In the final rule, FHFA has established parameters for Enterprise
Plans and the following aspects are described below: (1) Requirement
that the Plans have a three-year term; (2) definitions of those
activities eligible to include in Enterprise Plans; (3) requirement
that the Enterprises designate Plan activities for each underserved
market; (4) requirement that the Enterprises designate Plan objectives
for each activity and also specify the evaluation area for each Plan
objective; (5) submission and review of Enterprise Plans; (6)
modification of Enterprise Plans; and (7) the process for approving new
products.
1. Requirement for Underserved Markets Plans With Three-Year Terms--
Sec. 1282.32(a), (b)
Consistent with the proposed rule, Sec. 1282.32(a) and (b) of the
final rule provides that each Enterprise must prepare a Plan describing
the specific activities and objectives it will undertake to fulfill its
Duty to Serve obligations in each underserved market over a three-year
period. As discussed further below, objectives are the specific action
items that the Enterprises will identify for each activity. The Plan,
along with Evaluation Guidance to be provided by FHFA, will be the
basis for FHFA's evaluation of each Enterprise's Duty to Serve
performance. The Evaluation Guidance is discussed further below under
Sec. 1282.36.
Numerous commenters, including both Enterprises, supported the use
of Plans, which commenters stated is a reasonable way for the
Enterprises to describe their planned activities and objectives and for
FHFA to evaluate Enterprise performance. Fannie Mae recommended that
the Plans be simplified to align more closely with the requirements of
other federal regulators for Community Reinvestment Act (CRA) Strategic
Plans. Fannie Mae stated that such simplified Plans would require fewer
Enterprise resources to develop, thereby enabling the Enterprises to
devote more of their resources to engaging in activities in the
underserved markets. Freddie Mac also commented on the level of detail
required in the Plans and recommended that FHFA permit the Enterprises
to update their Plans annually in order to address changes.
FHFA has considered the feedback from commenters and has determined
that such Plans should be required in the final rule. Accordingly,
Sec. 1282.32(a) of the final rule requires the Enterprises to develop
Plans describing the specific activities and objectives they will
undertake to meet their Duty to Serve each underserved market.
Many commenters discussed the appropriateness of the proposed
three-year term for the Plans, with the large majority supporting three
years. A trade association commented that compliance with a requirement
to submit Plans every three years would be burdensome for the
Enterprises. Freddie Mac stated that reliably projecting activities and
benchmarks beyond the first year of the Plan would be challenging due
to changes in market conditions, lessons learned, and market
opportunities, and recommended that FHFA permit annual updates to the
Plans. FHFA has determined that three-year cycles are an appropriate
period of time for the Enterprises to be able to accomplish multiyear
objectives and that it is feasible for the Enterprises to forecast
activities and market conditions for Plan purposes. In addition, as
discussed below, the Enterprises will be permitted to annually modify
their Plans during the three-year cycle,, subject to FHFA Non-
Objection.
2. Eligible Activities for Underserved Markets--Sec. Sec. 1282.33(b),
1282.34(b), 1282.35(b), 1282.36(c)(3)
The final rule defines the scope of eligible activities that an
Enterprise may include in a Plan as those that facilitate a secondary
mortgage market on residential properties for very low-, low-, and
moderate-income families, consisting of: (1) Manufactured homes titled
as real property or personal property and manufactured housing
communities; (2) affordable rental housing preservation and affordable
homeownership preservation; and (3) rental housing and homeownership
housing in rural areas. See Sec. Sec. 1282.33(b), 1282.34(b),
1282.35(b), and 1282.36(c)(3). In a change from the proposed rule, the
scope of eligible activities in the final rule includes manufactured
homes titled as personal property, which is discussed in greater detail
below in Section C(1): Manufactured Housing.
Section 1282.36(c)(3) of the final rule also provides for extra
credit-eligible activities, including those that promote residential
economic diversity.
3. Underserved Markets Plan Activities--Sec. Sec. 1282.32(d);
1282.33(c), (d); 1282.34(c), (d); 1282.35(c), (d); 1282.36(c)(3)
a. Statutory, Regulatory, and Additional Activities
Consistent with the proposed rule, Sec. 1282.32 of the final rule
retains the requirement that each Enterprise's Plan

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describe all activities that the Enterprise will undertake for Duty to
Serve credit, with the activities grouped under the following
categories, as applicable:
Statutory Activities--Activities that assist affordable
housing projects under the eight affordable housing programs
specifically enumerated in the Safety and Soundness Act and any
comparable state and local affordable housing programs (a category that
is also specified in the Safety and Soundness Act);
Regulatory Activities--Activities in the underserved
markets that are designated as Regulatory Activities in the final rule;
and
Additional Activities--Other activities identified by an
Enterprise in its Plan that are determined by FHFA to be eligible for
that underserved market.
FHFA invites the Enterprises to include Additional Activities in
their Plans for FHFA's review and consideration. Additional Activities
may include, for example, activities that support other federal, state,
and local programs not specifically enumerated in the final rule that
would benefit from Enterprise support. Any Additional Activities must
be eligible under one of the three specified underserved markets as
defined in this final rule. If an Enterprise chooses to include an
Additional Activity in its Plan, the Enterprise must provide sufficient
explanation in its Plan of how the Additional Activity will target an
underserved segment of the market. In addition, an Enterprise must
describe how the Additional Activity ensures that there are adequate
levels of consumer protections or benefits to the tenants or homeowners
that are consistent with the requirements of other Statutory and
Regulatory Activities in the rule. As an example, for an Additional
Activity that pertains to energy efficiency to be eligible to include
in a Plan, an Enterprise would have to provide evidence that the
activity would provide a benefit comparable to how affordable housing
is preserved in the Regulatory Activities relating to energy
efficiency.
FHFA will also take into consideration how different the proposed
Additional Activity is from the other Duty to Serve Statutory and
Regulatory Activities. Additional Activities that are very similar to a
Statutory and Regulatory Activity will be subject to higher levels of
scrutiny, recognizing that the protections embedded in those activities
have been either statutorily enumerated by Congress, or have been
subject to the public comment process in the proposed Duty to Serve
rule, respectively and considered by FHFA.
The table below shows the Statutory and Regulatory Activities for
each of the three underserved markets.

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Underserved markets
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Activities Affordable housing
Manufactured housing preservation Rural areas
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Statutorily-Enumerated Activities None..................... 1. Section 8 programs... None.
2. Section 236 (rental
and cooperative housing
program).
3. Section 221(d)(4)
(moderate-income and
displaced families).
4. Section 202 (elderly)
5. Section 811 (persons
with disabilities).
6. Permanent supportive
housing projects
(homeless assistance).
7. Section 515 (rural
rental).
8. Low-Income Housing
Tax Credits (LIHTCs).
9. Comparable state and
local affordable
housing programs.
Regulatory Activities............ 1. Support manufactured 1. Support small 1. Support housing in
homes titled as real multifamily rental high-needs rural
property. property financing regions:
2. Support manufactured activity. Middle
homes titled as personal 2. Support financing of Appalachia.
property. multifamily energy The Lower
3. Support manufactured efficiency improvements. Mississippi Delta.
housing communities 3. Support financing of Colonias.
owned by government single-family energy Rural tracts in
instrumentalities, efficiency improvements. persistent poverty
nonprofits, or residents. 4. Support affordable counties.
4. Manufactured housing homeownership 2. Support housing for
communities with preservation (shared high-needs rural
specified minimum tenant equity) financing. populations:
pad lease protections. 5. Support HUD's Choice Native
Neighborhoods Americans in Indian
Initiative (CNI). areas.
6. Support HUD's Rental Agricultural
Assistance workers.
Demonstration (RAD) 3. Support financing by
Program. small financial
7. Support financing of institutions of rural
purchase or housing.
rehabilitation of 4. Support rural small
distressed properties. multifamily rental
property activity.
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Because the goal of the Duty to Serve statute is to increase the
amount of investment capital available for mortgage financing for very
low-, low-, and moderate-income households, Sec. Sec. 1282.32(a),
1282.33(a), 1282.34(a), 1282.35(a) of the final rule require the Plans
to include activities in each underserved market that serve all three
income categories in each year in which the Enterprise is evaluated and
rated. Any one activity may, but need not, serve more than one of the
three income categories.
b. Extra Credit-Eligible Activities
Section 1282.36(c)(3) of the final rule provides that certain
activities designated in the Evaluation Guidance, including those
activities that reduce the economic isolation of very low-, low-, and
moderate-income households by promoting residential economic diversity,
will be eligible for Duty to Serve extra credit.
FHFA received comments from a wide range of commenters who

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recommended providing extra credit for a diverse set of activities.
Extra credit-eligible activities, including residential economic
diversity activities, are not mandatory. However, in order to be
eligible to for extra credit, the Enterprises must include and describe
the designated activities and objectives in their Plans. Extra credit-
eligible activities, including residential economic diversity
activities, are discussed further below under Sec. 1282.36(c)(3).
c. Consideration of Minimum Number of Activities
This final rule does not require the Enterprises to engage in any
particular activity for Duty to Serve credit. However, the final rule
does require that the Enterprises consider a certain number of
activities and explain why they are either included in their Plans or
why they have chosen not to include them in their Plans. Section
1282.32(d)(1) of the final rule provides that FHFA will designate in
the Evaluation Guidance a minimum number of Statutory Activities or
Regulatory Activities that the Enterprises must consider for each
underserved market. For example, if FHFA decides that the Enterprises
must consider at least three Statutory or Regulatory Activities for a
given market, each Enterprise would be required to select any three
Statutory or Regulatory Activities and explain in its proposed Plan
whether it will engage in these activities, and if not, why not. This
is a change from the proposed rule, which would have required the
Enterprises to consider, and include explanations in their Plans for,
every Statutory and Regulatory Activity specified in the rule.\12\
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\12\ The proposed rule referred to the Statutory and Regulatory
Activities as ``Core'' Activities.
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Several policy advocacy organizations supported the proposed
approach that the Enterprises be required to consider and address every
Statutory and Regulatory Activity in their Plans. Some commenters
reasoned that the proposed approach would maintain accountability for
the programs enumerated in the statute, while at the same time provide
the Enterprises the flexibility to decide which activities to
undertake. A few commenters who advocated for the consideration of
every Statutory or Regulatory Activity in a Plan also supported
providing the Enterprises with broad discretion in deciding how to
serve the underserved markets.
Freddie Mac commented that by FHFA designating certain activities
as Statutory or Regulatory Activities, the proposed rule appeared to be
intended to guide the Enterprises towards certain Activities. Freddie
Mac also raised the concern that it might not be possible to create or
sustain a secondary mortgage market in certain submarkets. Fannie Mae
stated that the proposed approach could be simplified and made more
cost effective. Both Enterprises commented on the importance of having
discretion and flexibility to propose suitable activities for the
underserved markets.
After considering the comments, FHFA has determined in Sec.
1282.32(d)(1) of the final rule that it will state in the Evaluation
Guidance a minimum number of Statutory or Regulatory Activities that
the Enterprises must consider and address in their Plans, leaving to
the Enterprises the decision on which specific Statutory or Regulatory
Activities to consider and address under this requirement. This
approach balances the comments recommending that FHFA guide the scope
of activities and maintain accountability for the statutorily-
enumerated programs with the feasibility concerns of the Enterprises.
In addition, because the Enterprises' capacity to address the Statutory
and Regulatory Activities may change over time, providing flexibility
for FHFA to specify in the Evaluation Guidance the minimum number of
such activities to be considered and addressed in the Plans will enable
FHFA to change the minimum number each Plan cycle as appropriate. The
statutory programs in Sec. 1282.34(c)(5) and (c)(6) are excluded for
this purpose because they do not, at this time, lend themselves to
Enterprise support, so FHFA does not expect the Enterprises to address
these two programs in their Plans.
d. Activities and Objectives To Be Undertaken
Section 1282.32(d)(1) and (2) of the final rule provides that for
all Statutory, Regulatory, and Additional Activities that an Enterprise
chooses to undertake in its Plan, the Enterprise must address in its
Plan how it will undertake the activities and related objectives, which
are discussed further below. Section 1282.32(d)(3) provides that if an
Enterprise chooses to undertake an activity, such as a residential
economic diversity activity, for extra credit under Sec.
1282.36(c)(3), the Enterprise must describe the activity and related
objectives in its Plan.
The Enterprises may include as many Statutory, Regulatory, and
Additional Activities and related objectives in their Plans as they
consider feasible. FHFA will review the number of activities and
objectives included in an Enterprise's Plan, as well as the nature of
those activities, to determine whether the number is reasonable and
achievable, and the degree of potential impact on the underserved
markets.
4. Underserved Markets Plan Objectives for Each Activity--Sec.
1282.32(e), 1282.32(f)
Consistent with the proposed rule, Sec. 1282.32(e) of the final
rule provides that for each activity set forth in a Plan, the Plan must
include one or more objectives, which are the specific action items
that the Enterprises will identify for each activity. Objectives are
central to FHFA's Duty to Serve evaluation process and ratings
determinations. Objectives may cover a single year or multiple years.
Each objective must meet all of the following requirements:
Strategic. Directly or indirectly maintain or increase
liquidity to an underserved market;
Measurable. Provide measurable benchmarks, which may
include numerical targets, that enable FHFA to determine whether the
Enterprise has achieved the objective;
Realistic. Calibrated so that the Enterprise has a
reasonable chance of meeting the objective with appropriate effort;
Time-bound. Subject to a specific timeframe for completion
by being tied to Plan calendar year evaluation periods; and
Tied to analysis of market opportunities. Based on
assessments and analyses of market opportunities in each underserved
market, taking into account safety and soundness considerations.
A number of policy advocacy organizations and nonprofit lenders
supported FHFA's proposed approach for the objectives. A policy
advocacy organization and a nonprofit organization suggested regulatory
language changes that it stated would enhance the specificity of the
Enterprise's objectives, strengthen the ability of the public and FHFA
to assess compliance with the Enterprise's stated objectives, and
measure their impact. FHFA believes that such changes are not necessary
as the Evaluation Guidance will contain sufficient information
regarding the process for developing the Plans.
Statutory Evaluation Areas
As proposed, Sec. 1282.32(f) of the final rule provides that each
Plan objective must incorporate one or more of the following four
statutory evaluation areas (referred to as ``assessment factors'' in

[[Page 96247]]

the proposed rule), which are set forth in Sec. 1282.36(b) of the
final rule:
Outreach. The outreach evaluation area requires evaluation
of ``the extent of outreach [by the Enterprises] to qualified loan
sellers and other market participants'' in each of the three
underserved markets.\13\ A Plan objective could describe how an
Enterprise would engage market participants, such as through conducting
meetings and conferences with current and prospective seller/servicers
and providing technical support to seller/servicers, in order to
accomplish a Plan activity. Market participants could include
traditional participants in Enterprise programs, as well as non-
traditional participants such as consortia sponsored by banks,
nonprofit organizations, real estate developers, and state and local
governments.
---------------------------------------------------------------------------

\13\ 12 U.S.C. 4565(d)(2)(B).
---------------------------------------------------------------------------

Loan Product. The loan product evaluation area requires
evaluation of an Enterprise's ``development of loan products, more
flexible underwriting guidelines, and other innovative approaches to
providing financing to each'' underserved market.\14\ A Plan objective
could describe, for example, how the Enterprise will reevaluate its
underwriting guidelines, which could include empirical testing of
different parameters and modification of loan products in an effort to
increase the availability of loans to families targeted by the Duty to
Serve, consistent with safe and sound lending practices. FHFA expects
the Enterprise to identify and assess current underwriting guidelines
that may impede service to very low-, low-, and moderate-income
families in the underserved markets.
---------------------------------------------------------------------------

\14\ 12 U.S.C. 4565(d)(2)(A).
---------------------------------------------------------------------------

Loan Purchase. The loan purchase evaluation area requires
FHFA to consider ``the volume of loans purchased in each of such
underserved markets relative to the market opportunities available to
the [E]nterprise.'' \15\ The Safety and Soundness Act further states
that FHFA ``shall not establish specific quantitative targets nor
evaluate the [E]nterprises based solely on the volume of loans
purchased.'' \16\ A Plan objective could include the Enterprise's plans
for purchasing loans in particular underserved markets, including its
assessments and analyses of the market opportunities available for each
underserved market and its expected volume of loan purchases for a
given year.
---------------------------------------------------------------------------

\15\ 12 U.S.C. 4565(d)(2)(C).
\16\ Id.
---------------------------------------------------------------------------

Although the final rule does not establish quantitative targets,
FHFA will consider the Enterprise's past performance on the volume of
loans purchased in a particular underserved market relative to the
volume of loans the Enterprise actually purchases in that underserved
market in a given year pursuant to its Plan. In reviewing the Plan and
the loan purchase evaluation area, FHFA will take into account
difficulties in forecasting future performance and the need for
flexibility in dealing with unexpected market changes.
Investments and Grants. The investments and grants
evaluation area requires evaluation of ``the amount of investments and
grants in projects which assist in meeting the needs of such
underserved markets.'' \17\ A Plan objective could include investments.
As with all activities, the investments must comply with the
Enterprises' Charter Acts.\18\ FHFA has directed the Enterprises to
refrain from making grants because they are in conservatorship.
Accordingly, during the period of conservatorship, FHFA does not intend
to provide Duty to Serve credit to the Enterprises for making grants.
---------------------------------------------------------------------------

\17\ 12 U.S.C. 4565(d)(2)(D).
\18\ 12 U.S.C. 1451 et seq. and 12 U.S.C. 1716 et seq.
---------------------------------------------------------------------------

FHFA received a number of comments on the four evaluation areas.
The two evaluation areas that received the most comments were loan
products, and grants and investments. For the loan products evaluation
area, commenters offered suggestions for specific pilots and for
enhancing the criteria to use when assessing loan product activities.
Commenters generally expressed support for the development of new loan
products. The commenters were nearly unanimous in expressing their
support for the Enterprises to be allowed to receive Duty to Serve
credit for investments and grants, with many suggesting specific uses
for those funds.
The proposed rule specifically requested comment on whether Duty to
Serve credit should be given under the loan product evaluation area for
research and development activities that may not show initial results.
Several trade associations, nonprofit lenders, and policy advocacy
organizations, as well as the Enterprises supported providing Duty to
Serve credit for this activity even without initial results. A few
commenters offered qualified support for research and development only
for targeted markets and focused activities provided the research and
development activities are robust, the data collected and findings are
shared with industry stakeholders, and the research and development
activities mesh with already well-developed concepts that have the
potential to reach the market within a short period of time.
After considering the comments, FHFA has determined that it is
reasonable to make Enterprise research and development activities
eligible for Duty to Serve credit under the loan product or outreach
evaluation areas because of their importance in encouraging innovation
and creative solutions to the challenges that exist in the underserved
markets.
Requirement of a Single Evaluation Area for Each Objective
Section 1282.32(f) of the final rule provides that an Enterprise
must designate in its Plan the evaluation area under which each Plan
Objective will be evaluated.
Under the proposed rule, an objective would have been eligible to
receive Duty to Serve credit under only one evaluation area in each
underserved market for each year. Both Enterprises objected to this
proposed requirement, stating that Duty to Serve credit should be
available under multiple evaluation areas within an underserved market.
Fannie Mae argued that Plan activities, regardless of which evaluation
area they are in, are intertwined with achieving the end result of
better serving an underserved market. Freddie Mac argued that the
proposed requirement would undercount Enterprise support for activities
that meet multiple evaluation areas within a particular market and
could result in imprecise or arbitrary classification of the
Enterprises' activities or objectives.
After considering the comments, FHFA has determined in the final
rule that each objective should only be eligible to receive Duty to
Serve credit under one evaluation area per year in an underserved
market. This requirement is not intended to preclude or discourage the
Enterprises from undertaking multi-faceted activities and objectives
that take place over several years. Rather, the Enterprises will simply
be required to identify one evaluation area for each objective during
each year of a Plan cycle that reflects the Enterprise's primary focus
for the objective. In many instances, this may involve an Enterprise
specifying separate objectives to cover actions relating to different
evaluation areas. For example, a multi-faceted objective, such as one
involving research and development, could foreseeably be assessed under
outreach in year one of

[[Page 96248]]

a Plan, and under loan products in year two of the Plan. Identifying
the primary evaluation area for each objective, for each year, will
focus Enterprise efforts and make it easier for FHFA and other
stakeholders to evaluate their performance.
5. Plan Procedures--Sec. 1282.32(g)
a. Submission of Proposed Plans--Sec. 1282.32(g)(1)
Section 1282.32(g)(1) of the final rule establishes a process and
timeline for the Enterprises to submit their proposed Plans to FHFA for
review, with some changes to the process and timeline in the proposed
rule. The final rule also establishes distinct timelines for the first
Plan development cycle and subsequent Plan cycles.
For the first Plan development cycle following the publication of
the final rule, the Enterprises will be required to submit their
proposed Plans to FHFA within 90 days after the posting of the proposed
Evaluation Guidance on FHFA's Web site. This is a change from the
proposed rule, which would have required submitting the first proposed
Plan to FHFA pursuant to a timeframe and procedures to be established
by FHFA, and would have required FHFA to provide to each Enterprise an
individualized Evaluation Guide containing a scoring matrix for its
Plan after Non-Objection to the Plan.
For subsequent proposed Plans after the first Plans, FHFA will
provide timelines 300 days before the termination date of the Plan in
effect, or a later date if additional time is necessary for proposed
Plan submission, public input periods, and Non-Objection to an
undeserved market in a Plan. FHFA envisions that these timelines will
be part of the Evaluation Guidance. Unless otherwise directed by FHFA,
each Enterprise must submit a proposed Plan to FHFA at least 210 days
before the termination date of the Enterprise's Plan in effect.
Several policy advocacy organizations, a trade organization, and
both Enterprises expressed the need for greater certainty earlier in
the Plan development process as to how the Enterprises will be
evaluated by FHFA. FHFA agrees that providing more details on the Plan
submission and review process will assist the Enterprises in developing
their proposed Plans and assist the public in understanding how the
Enterprises will be evaluated. Accordingly, under the final rule, FHFA
will provide the proposed Evaluation Guidance to the Enterprises prior
to the date the Enterprises must submit their proposed Plans to FHFA,
as opposed to providing an Evaluation Guide to each Enterprise after
submission of its Plan, as proposed. Specifically, FHFA will provide
the proposed Evaluation Guidance to the Enterprises at least 90 days
before their proposed Plans are due to FHFA and will post the proposed
Evaluation Guidance on FHFA's Web site for public input. For the first
Plan development cycle, FHFA expects to provide the proposed Evaluation
Guidance to the Enterprises within 30 days of the date of the posting
of this final rule on FHFA's Web site.
b. Posting of Proposed Plans and Public Input--Sec. 1282.32(g)(2), (3)
Section 1282.32(g)(2) of the final rule establishes a process and
timeline for public input on the Enterprises' proposed Plans, with some
changes to the process and timeline set forth in the proposed rule.
Consistent with the proposed approach, the final rule provides that as
soon as practical after an Enterprise submits its proposed Plan, FHFA
will post a public version of the proposed Plan, with any proprietary
and confidential data and information omitted, on FHFA's Web site for
public input. Section 1282.32(g)(3) of the final rule provides that the
public input period for the first cycle of proposed Plans will be 60
days, a change from the proposed rule's 45 days.
There was broad support from a wide range of commenters, including
policy advocacy organizations, nonprofit intermediaries, trade
associations and state housing finance agencies for posting the
Enterprises' proposed Plans for public input. Commenters stated that
public input would improve the quality of the Plans, add accountability
to the Plan review process, and improve FHFA's evaluation of the
adequacy of the proposed Plans.
Both Enterprises expressed concerns about posting the proposed
Plans for public input, stating that the Plans would contain
proprietary and confidential information and that the process of
preparing a public version of the proposed Plan could be time
intensive. The Enterprises and some commenters also expressed
significant concerns about the proposed rule's timeline for specific
actions related to proposing and reviewing the Plans. The primary
criticisms from various commenters were that the proposed deadlines
would not provide sufficient time for the Enterprises to develop their
proposed Plans, for stakeholders to provide input on the proposed
Plans, for FHFA to adequately consider the public input, and for the
Enterprises to incorporate changes in response to the public input. For
example, a policy advocacy organization stated that because of the
complexity of the Plans, along with the number of activities they are
likely to cover, the public would likely need 60-90 days to provide
sufficient input on the proposed Plans.
After considering the comments, FHFA has determined that a public
input process for the Enterprises' proposed Plans can be implemented
that provides transparency and an opportunity for productive public
input, while preserving the proprietary and confidential nature of
Enterprise data and information. Public input can provide significant
value in assisting the Enterprises to identify the needs of the
underserved markets, as well as the specific activities that could help
meet those needs. FHFA has also determined that the proposed 45-day
public input period should be increased to 60 days. Accordingly, under
Sec. 1282.32(g)(3) of the final rule, for the Enterprises' first
proposed Plans, the public will have 60 days from the date the proposed
Plans are posted on FHFA's Web site to provide input. The Enterprises'
subsequent proposed Plans will be available for public input pursuant
to the timeframe and procedures established by FHFA. FHFA envisions
that the timeframe and procedures for public input on subsequent
proposed Plans will be specified in future Evaluation Guidance.
c. Enterprise Review--Sec. 1282.32(g)(4)
Consistent with the proposed rule, Sec. 1282.32(g)(4) of the final
rule provides that each Enterprise may, in its discretion, make
revisions to its proposed Plan based on public input.
d. FHFA Review--Sec. 1282.32(g)(5)
Section 1282.32(g)(5) of the final rule provides that for the first
Plan development cycle following publication of the final rule, FHFA
will review each Enterprise's proposed Plan, and within 60 days or such
additional time as may be necessary from the end of the public input
period, provide each Enterprise with FHFA's comments on its proposed
Plan. FHFA has determined that a 60-day review period generally should
provide sufficient time for review of the Enterprises' proposed Plans.
For subsequent Plan development cycles, as opposed to the 45-day
review period in the proposed rule, the final rule provides that FHFA
will establish a timeframe and procedures for FHFA review, comments,
and any required Enterprise revisions for the subsequent proposed
Plans. FHFA envisions that the timeframe and procedures for FHFA's
review of the subsequent

[[Page 96249]]

proposed Plans will be specified in future Evaluation Guidance. This
will allow the review process for subsequent proposed Plans to remain
flexible and aligned with the future timelines for submitting the
Enterprises' proposed subsequent Plans and publishing the Evaluation
Guidance.
The Enterprises will be required to address FHFA's comments on
their proposed Plans, as appropriate, through revisions to their
proposed Plans pursuant to the timeframe and procedures established by
FHFA.
e. Designation of Statutory or Regulatory Activity for FHFA
Consideration in Issuing a Non-Objection--Sec. 1282.32(g)(5)(iii)
Section 1282.32(g)(5)(iii) of the final rule provides that FHFA
may, in its discretion, designate in the Evaluation Guidance one
Statutory Activity or Regulatory Activity in each underserved market
that FHFA will significantly consider in determining whether to provide
a Non-Objection to that underserved market in an Enterprise's proposed
Plan. This provision was not included in the proposed rule.
This provision evolved from comments that FHFA received suggesting
that some Statutory and Regulatory Activities are so important that
FHFA should require the Enterprises to engage in them. Several
commenters recommended a number of specific Statutory or Regulatory
Activities that should be mandatory, with residential economic
diversity and a chattel manufactured housing pilot being the most
frequently cited, on the basis that these activities are the most
likely to have an impact on the underserved markets.
After considering the comments, FHFA has determined to maintain the
approach in the proposed rule and not make any Statutory or Regulatory
Activities mandatory in the final rule. FHFA has concerns that
mandating a specific activity, without first considering how the
Enterprise would propose conducting an activity to ensure that it would
be undertaken in a safe and sound manner, would be inadvisable.
Instead, Sec. 1282.32(g)(5)(iii) of the final rule provides that
FHFA may, in its discretion, designate in the Evaluation Guidance one
Statutory or Regulatory Activity in each underserved market that FHFA
will significantly consider in determining whether to provide a Non-
Objection to that underserved market in a proposed Plan. This provision
of the final rule provides FHFA with the authority to transparently
communicate a priority activity to the Enterprises and puts the
Enterprises on notice that FHFA will evaluate their decisions to either
include or not include this activity in their Plans. For example, FHFA
might encourage the Enterprises to consider serving challenging regions
or populations such as Middle Appalachia, or challenging activities
such as shared equity homeownership or agricultural workers' housing,
which could require more time and effort to make an impact on the
underserved market than other activities. In determining whether to
issue a Non-Objection where an Enterprise has chosen not to include the
designated Statutory or Regulatory Activity in its Plan, FHFA will
consider whether the Enterprise has made a convincing case in its Plan
for not including it.
f. FHFA Non-Objections to Underserved Markets in a Plan--Sec.
1282.32(g)(5)(iv)
This final rule provides that FHFA will issue three Non-Objections
for a Plan--one for each underserved market--and not for the Plan as a
whole. Section 1282.32(g)(5)(iv) of the final rule provides that after
FHFA is satisfied that all of its comments on an individual underserved
market section in an Enterprise's proposed Plan have been addressed,
FHFA will issue a Non-Objection for that underserved market in the
Plan. This is a change from the proposed rule, which would have
required FHFA to issue a single Non-Objection for the entire proposed
Plan.
Several policy advocacy organizations commented that the proposed
rule did not make clear the procedures and consequences FHFA would
invoke in the event its issuance of a Non-Objection delayed the start
of a Plan. This could occur under the proposed approach where FHFA is
not satisfied that its comments on an Enterprise's plans for a
particular underserved market have been addressed and FHFA is unable to
issue a Non-Objection to the entire Plan, thereby preventing the
Enterprise from commencing implementation of its Plan in all of the
three underserved markets. Under the final rule, FHFA will issue a
separate Non-Objection for each of the three underserved markets, which
will enable the Enterprises to proceed with implementing their plans
for a particular underserved market that has received a Non-Objection
without having to wait for FHFA's Non-Objection to the other
underserved markets. The next section describes the final rule's
approach in the event that there is a delay in FHFA's ability to
provide a Non-Objection for one or more underserved markets in a Plan.
g. Effective Dates of Underserved Markets in Plans--Sec. 1282.32(g)(6)
Section 1282.32(g)(6) of the final rule provides that the effective
date of an underserved market in a Plan that has received a Non-
Objection from FHFA by December 1 of the prior year will be January 1
of the first evaluation year for which the Plan is applicable. Where an
underserved market in a Plan does not receive a Non-Objection by
December 1 of the prior year, the effective date for that underserved
market will be determined by FHFA. This provision is changed from the
proposed rule to take into account that the timing of receiving Non-
Objections for each of the underserved markets in a proposed Plan may
impact the effective dates for those sections of the Plan. Based on the
extent of the delay, FHFA will also describe the impact of any delay in
a Plan's effective date on the evaluation and rating processes for the
affected underserved market.
h. Posting of Underserved Market Sections of Plans--Sec. 1282.32(g)(7)
Section 1282.32(g)(7) of the final rule provides that as soon as
practical after FHFA issues a Non-Objection to an underserved market in
an Enterprise's Plan, that section of the Plan will be posted on the
Enterprise's and FHFA's respective Web sites, with any confidential and
proprietary data and information omitted. This provision is revised
from the proposed rule to take into account that particular underserved
markets in a proposed Plan may receive Non-Objections at different
times.
6. Modifying Underserved Markets Plans--Sec. 1282.32(h)
As proposed, Sec. 1282.32(h) of the final rule provides that at
any time after implementation of a Plan, an Enterprise may request to
modify its Plan during the three-year term, subject to FHFA Non-
Objection of the proposed modifications, and FHFA may require an
Enterprise to modify its Plan during the three-year term. FHFA and the
Enterprises may seek public input on proposed modifications to a Plan
if FHFA determines that public input would assist its consideration of
the proposed modifications. If a Plan is modified, the modified Plan,
with any confidential and proprietary information and data omitted,
will be posted on the Enterprise's and FHFA's respective Web sites.
Several commenters, including both Enterprises, supported allowing
the final Plans to be modified during the three-year term. A number of
commenters also recommended that

[[Page 96250]]

FHFA require the Enterprises to solicit public input on their proposed
Plan modifications, with some suggesting between 30 and 90 days for
such input. Policy advocacy organizations also recommended that FHFA
provide public notice when significant modifications to a final Plan
receive a Non-Objection, with the modifications and rationale for
FHFA's Non-Objection detailed. Freddie Mac strongly supported allowing
Plan modifications, and recommended that FHFA establish a simple notice
and review process without public input when modifications merely
reflect changes in the market.
After considering the comments, FHFA has determined that Plan
modifications generally should be permitted, as set forth in the
proposed rule. Because of the detailed level of information that the
Enterprises need to include in their Plans, FHFA envisions allowing the
Enterprises to annually adjust their Plans to reflect their progress,
to incorporate lessons learned from executing their Plans, and to make
other appropriate adjustments. Additionally, FHFA envisions utilizing
the same annual adjustment to ensure that Plan objectives continue to
represent meaningful progress over time. However, to maintain the
integrity of the final Plans, ad hoc modifications, occurring outside
of the annual adjustment, should occur only in special circumstances
and should not be a routine part of the process. Instances in which
FHFA might require an Enterprise to modify its Plan include significant
changes in market conditions, including obstacles and opportunities, or
significant safety and soundness concerns arising during the three-year
term of the Plan.
FHFA is more likely to seek public input on a proposed Plan
modification where an Enterprise requests to eliminate an activity or
objective from its Plan, or make numerous changes to the Plan, as
opposed to, for example, a request to modify the measurable quantity of
an objective by a modest amount.
7. Enterprise New Products and New Activities
Enterprise new products and new activities are subject to the prior
approval and prior notice requirements pursuant to the Safety and
Soundness Act.\19\ If an Enterprise determines that a new product or
new activity would facilitate its Duty to Serve obligations and would
be consistent with safety and soundness, it may propose that new
product or new activity for FHFA consideration.
---------------------------------------------------------------------------

\19\ See 12 U.S.C. 4541.
---------------------------------------------------------------------------

C. Underserved Markets

1. Manufactured Housing Market--Sec. 1282.33
The below section describes the final rule provisions for the
manufactured housing market and explains FHFA's rationale for adopting
four Regulatory Activities for this market. The Regulatory Activities
are for: (1) Manufactured homes titled as real property, (2)
manufactured homes titled as personal property, (3) manufactured
housing communities owned by government units or instrumentalities,
nonprofits, or residents; and (4) manufactured housing communities with
specified minimum tenant pad lease protections.
FHFA's final rule does not adopt the small manufactured housing
community Regulatory Activity that was included in the proposed rule.
The below section also discusses the affordability methodology adopted
in the final rule.
a. Eligible Activities--Sec. 1282.33(b)
Section 1282.33(b) of the final rule provides that Enterprise
activities eligible to be included in a Plan for the manufactured
housing market are activities that facilitate a secondary market for
mortgages on residential properties for very low-, low-, or moderate-
income families in the manufactured housing market. The manufactured
housing market consists of manufactured homes and manufactured housing
communities. As defined in the final rule, manufactured homes include:
(i) Manufactured homes titled as personal property (also referred to as
``chattel''), and (ii) manufactured homes titled as real property. The
proposed rule would have included manufactured housing communities and
manufactured homes titled as real property, but not manufactured homes
titled as chattel. As further discussed below, after extensive research
and consideration of the comments received on chattel lending, FHFA has
also included Enterprise support for chattel loans as a Regulatory
Activity in the final rule.
Definition of ``Manufactured Home''
Consistent with the proposed rule, Sec. 1282.1 of the final rule
defines ``manufactured home'' to mean a home as defined in section
603(6) of the National Manufactured Housing Construction and Safety
Standards Act of 1974, as amended (42 U.S.C. 5401 et seq.) (referred to
here as the ``HUD Code''). As in the proposed rule and because of
concerns about the structural integrity of pre-HUD Code homes,
activities related to manufactured homes that are not compliant with
the HUD Code are excluded from the definition and activities supporting
them are not eligible for Duty to Serve credit in the final rule.
Some commenters favored Duty to Serve credit for Enterprise support
for financing of pre-HUD Code manufactured homes (i.e., those built
prior to June 15, 1976). A nonprofit organization focused on rural
housing estimated that one-fifth of rural manufactured homes are pre-
HUD Code mobile homes.\20\ In joint comment letters, two manufactured
housing trade associations noted that in ``55 and over'' manufactured
housing communities, some residents are low-, fixed-income seniors with
no source of financing for their pre-HUD Code mobile homes. They
further noted that in ``all age communities,'' pre-HUD Code home
occupants are often low-income and work ``blue collar'' jobs or depend
on government assistance.
---------------------------------------------------------------------------

\20\ See Housing Assistance Council, ``Moving Home--Manufactured
Housing in Rural America'' (Dec. 2005), available at http://www.ruralhome.org/storage/documents/movinghome.pdf.
---------------------------------------------------------------------------

Pre-HUD Code homes, even those with modifications, do not meet HUD
standards and cannot be accepted as compliant with the HUD Code.\21\
FHFA acknowledges the financing needs for owners of pre-HUD Code homes
and may reconsider the matter in a future rulemaking if appropriate
methodologies can be found for assuring the structural integrity of the
homes.
---------------------------------------------------------------------------

\21\ See generally U.S. Department of Housing and Urban
Development, ``Frequently Asked Questions'' (HUD homepage),
available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/mhs/faqs.
---------------------------------------------------------------------------

b. Regulatory Activities--Sec. 1282.33(c)
Section 1282.33(c) of the final rule establishes four specific
Regulatory Activities under the manufactured housing market. Two of
these Regulatory Activities pertain to Enterprise support for financing
of single-family manufactured homes titled as real property or chattel,
and two pertain to Enterprise support for financing of blanket loans
for manufactured housing communities.
(i) Chattel: Loans on Manufactured Homes Titled as Personal Property--
Sec. 1282.33(c)(2)
Section 1282.33(c)(2) of the final rule establishes a Regulatory
Activity for Enterprise activities related to facilitating a secondary
market for loans on manufactured homes titled as

[[Page 96251]]

personal property, also referred to as chattel. The proposed rule did
not include chattel lending as an eligible activity under the
manufactured housing market. The proposed rule discussed issues related
to chattel loans and specifically requested comment on whether the
Enterprises should receive Duty to Serve credit for purchasing chattel
loans, either on a pilot or an ongoing basis.
FHFA received almost 1,400 comment letters on whether Enterprise
purchases of chattel loans should be an eligible activity that receives
Duty to Serve credit. The vast majority of the letters were form
letters signed by individuals and small businesses in the manufactured
housing industry recommending Duty to Serve credit for Enterprise
support of chattel loans. FHFA also received many individual comment
letters from trade associations, consumer advocacy organizations, and
manufactured housing community owners and operators supporting Duty to
Serve credit for chattel loans. Three Members of Congress also
supported Duty to Serve credit for chattel loans.
Several trade associations for the manufactured housing industry
favored Duty to Serve credit for chattel loans but acknowledged that
modifications such as credit enhancements and greater borrower
protections could facilitate secondary market support for these loans.
One trade association for the manufactured housing industry had a
different view, strongly supporting Duty to Serve credit for chattel
loans but opposing any additional credit enhancements or borrower
protections for chattel loans. All of these manufactured housing
industry commenters advised that manufactured housing is a significant
source of unsubsidized affordable housing and manufactured home
borrowers have significant needs for financing that are not being met.
The commenters further stated that the absence of a secondary market
and the lack of available financing for chattel loans have severely
impacted the manufactured housing industry, resulting in closures of
many factories nationwide. Several trade associations for the
manufactured housing industry and a financial marketing corporation
commented that much of the pricing disparity between chattel loans and
real estate loans results from the absence of a significant secondary
market for chattel loans.
In a change from their comments on the 2010 proposed rule, a number
of consumer advocacy organizations and nonprofit organizations favored
Duty to Serve credit for chattel loans as long as there are adequate
consumer protections. A state housing finance agency similarly
supported Duty to Serve credit for a chattel pilot provided there are
strong underwriting and tenant protections.
A federal financial regulatory agency did not take a position on
Duty to Serve credit for chattel loans but urged FHFA to protect
chattel loan borrowers, whom the agency stated are particularly
vulnerable to unfair lending practices.
A trade association for community bankers was among the few
commenters opposing Duty to Serve credit for chattel loans. The trade
association expressed general concern about the Enterprises' safety and
soundness, as well as the risks that attend chattel lending, stating
that more could be done to support real estate lending for manufactured
housing, which the trade association stated is a safer loan product. A
joint comment letter signed by several policy advocacy organizations
and nonprofit organizations opposed any Duty to Serve credit for
chattel loans, noting the abuses and high default rates detailed in the
SUPPLEMENTARY INFORMATION to the proposed rule.
Freddie Mac opposed Duty to Serve credit for chattel loans, as it
did in its comment letter on the 2010 proposed rule, without providing
a rationale. Fannie Mae did not address chattel loans, a change from
its comment letter on the 2010 proposed rule in which it opposed Duty
to Serve credit for chattel loans.
After considering the comments, FHFA has decided to establish a new
Regulatory Activity in Sec. 1282.33(c)(2) of the final rule for
Enterprise support for chattel loans. While FHFA expects the
Enterprises to also serve manufactured homes titled as real estate,
which include borrower protections and is discussed in greater detail
in the next section, FHFA has also determined that the pursuing pilot
initiatives, in safe and sound manner, that serve very low-, low-, and
moderate-income households who live in manufactured homes titled as
chattel, should be eligible for Duty to Serve credit.
FHFA makes this change in the final rule having considered the
feedback from many commenters in support of providing the Enterprises
with Duty to Serve credit for chattel-titled lending. FHFA also makes
this change having considered the potential for the Enterprises' to
improve liquidity and access to credit in the manufactured housing
market generally and for very low-, low-, and moderate-income
households.\22\ For example the percentage of new manufactured homes
titled as chattel has increased from 67 percent in 2009 to 80 percent
in 2015.\23\ Additionally, efforts to expand the real estate titled
share of the market have faced some difficulties.\24\ FHFA also makes
this change having considered the potential for the Enterprises to
improve the chattel lending market through standardization that
includes borrower protections.
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\22\ One indicator of how little liquidity exists is that over
70 percent of manufactured home loans reported under HMDA are held
in portfolio by the lenders, compared with 16 percent for site-built
homes. See Consumer Financial Protection Bureau, ``Manufactured-
housing consumer finance in the United States,'' p. 37 (Sept. 2014),
available at http://files.consumerfinance.gov/f/201409_cfpb_report_manufactured-housing.pdf.
\23\ See U.S. Commerce Department, Census Bureau, ``Cost & Size
Comparisons For New Manufactured Homes and New Single-Family Site-
Built Homes'' (2007-2015), available at https://www.census.gov/data/tables/2015/econ/mhs/2015-annual-data.html.
\24\ One factor inhibiting the potential for market change is
that manufactured home dealers and lenders are not legally obligated
to explain the titling of homes to buyers or its implications. See
generally Ann M. Burkhart, Bringing Manufactured Housing into the
Real Estate Finance System, 37 Pepp. L. Rev. 427, 443 (Mar. 2010),
available at http://cfed.org/assets/pdfs/manufactured_housing/advocacy_center/mht/Burkhart_MH_Finance.pdf. Another factor is that
state laws for converting the titles of manufactured homes from
chattel to real property present challenges. For example, some
states prohibit converting titles for manufactured homes on leased
land. See National Consumer Law Center, ``Titling Homes as Real
Property'' (Oct. 2015), available at https://www.nclc.org/images/pdf/manufactured_housing/titling-homes2.pdf. See also Ann M.
Burkhart, Bringing Manufactured Housing into the Real Estate Finance
System, 37 Pepp. L. Rev. 427, 443-444 (Mar. 2010), available at
http://cfed.org/assets/pdfs/manufactured_housing/advocacy_center/mht/Burkhart_MH_Finance.pdf.
---------------------------------------------------------------------------

In making this change in the final rule, FHFA is also aware of the
challenges and risks, which FHFA discussed in detail in the proposed
rule, that the Enterprises would face in exploring the chattel lending
market. As is discussed in the following sections, FHFA would require
the Enterprises to methodically assess ways to mitigate these
challenges and risks before beginning any chattel loan purchases.
Additionally, FHFA would also conduct a thorough review and assessment
of any chattel loan pilot initiative, both when proposed by the
Enterprise and, if approved, throughout its execution by the
Enterprise. This review is a core part of FHFA's regulatory
responsibilities in overseeing all of the Enterprises' Duty to Serve
activities, but FHFA believes it is appropriate to emphasize this point
for chattel lending since it would be a new purchase activity for the
Enterprises.
Review of Enterprise Chattel Loan Pilot Initiatives. Initially,
only approved chattel loan pilot initiatives included in an
Enterprise's Plan would be eligible for Duty to Serve credit. Under an

[[Page 96252]]

Enterprise Plan to pursue such a chattel loan pilot initiative, FHFA
review of the pilot initiative would also be required under the new
product and activities statute prior to any purchases by the Enterprise
of chattel loans.\25\ To facilitate a timely new product review, an
Enterprise's Plan should indicate when the Enterprise expects to
commence purchasing chattel loans as part of a pilot initiative prior
to any purchases by the Enterprise of chattel loans.
---------------------------------------------------------------------------

\25\ See 12 U.S.C 4541.
---------------------------------------------------------------------------

As described in greater detail below, FHFA will carefully assess a
number of factors in reviewing any chattel loan pilot or ongoing
initiative included in an Enterprise Plan. While the final rule does
not contain pre-determined limitations on pilot chattel loan
initiatives, FHFA could include such parameters in the Evaluation
Guidance. For example, the final rule does not restrict the location of
the manufactured homes (within or outside of a manufactured housing
community), the volume of Enterprise chattel loan purchases, the
duration of any initiative, or the Enterprises' counterparties. Nor
does the final rule restrict the specific terms and features of an
acceptable chattel loan product beyond those restrictions applicable to
all single-family loan purchases. However, FHFA could address some of
these parameters in the Evaluation Guidance, and FHFA will also
consider them in determining whether to provide a Non-Objection to an
Enterprises Plan for the manufactured housing market and for purposes
of the new product review.
FHFA will review the results of a chattel loan pilot initiative
conducted by an Enterprise, including an assessment of safety and
soundness. If at any time FHFA believes that such a pilot poses a risk
to the safety and soundness of the Enterprises, as with any activity
under a Duty to Serve Plan, FHFA would require the Enterprise to modify
or stop its activities accordingly. If, however, FHFA determines that a
pilot initiative has been successful, and the Enterprise wishes to
pursue an ongoing initiative for chattel loans, that ongoing initiative
would require FHFA approval.
The below sections discuss a number of factors that FHFA will
consider in reviewing any Enterprise Plan to pursue pilot chattel loan
initiatives, including the financial performance of chattel loans,
possible risk mitigants, and borrower and tenant protections.
Financial Performance of Chattel Loans. An important factor in
determining the potential success of any chattel pilot would be access
to reliable data about chattel loan performance. According to
manufactured housing industry representatives, since the manufactured
housing subprime crisis in 1999 to 2000, manufactured home loan
underwriting standards and practices have sharply improved.\26\
However, little default and foreclosure data for conventional chattel
loans are publicly available to determine how well chattel loans have
performed.\27\
---------------------------------------------------------------------------

\26\ See Cavco Industries, Inc., ``Annual Report on Form 10-K
for the Fiscal Year Ended March 28, 2015,'' pp. 8-9 (Mar. 28, 2015),
available at http://investor.cavco.com/public/phhweb/gallery/userupload/ir-doc-386/cvco_2015.3.28_10k.pdf; George Allen,
``Manufactured Housing Primer,'' pp. 2-3 (Franklin Printing, Apr.
2010). See generally Ronald Wirtz, ``Home, sweet (manufactured?)
home,'' Fedgazette (Federal Reserve Bank of Minneapolis, July 1,
2005), available at https://www.minneapolisfed.org/publications/fedgazette/home-sweet-manufactured-home.
\27\ Regarding the paucity of data on manufactured housing
overall, see generally Matthew Furman, ``Eradicating Substandard
Manufactured Homes: Replacement Programs as a Strategy,'' p. 4 (Nov.
2014) (A paper submitted to Harvard's Joint Center for Housing
Studies and NeighborWorks America), available at http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/w15-3_furman.pdf.
---------------------------------------------------------------------------

This limited data about chattel lending has not only been a
challenge for FHFA in developing this rule, but FHFA also understands
that it will be an ongoing challenge for the Enterprises in developing
any chattel loan pilot initiative. Therefore, as part of any Plan that
includes chattel loan activities, FHFA expects that the Enterprises
would work to develop better financial performance data both in
preparation for a chattel loan pilot purchase initiative and through
the implementation of the pilot itself.
One source of chattel loan data that, while limited, would be
relevant in considering a chattel loan pilot initiative is the Federal
Housing Administration's (FHA) Title I manufactured home chattel loans
insurance program. Data for the 2010 originations of Title I chattel
loans show that as of year-end 2015, claims had been filed with FHA on
218 out of 1,789 loans endorsed (12 percent).\28\ Data for Title I
chattel loans showing the percentage of delinquencies, however, are not
available. Also, credit score data on Title I loans are incomplete due
to the lack of credit scores for some borrowers who do not have
traditional credit accounts on which scores are generated by the
national credit agencies. The Office of Management and Budget projects
that Title I chattel loans for fiscal year 2017 will have a 19 percent
recovery rate.\29\ FHA data further show that interest rates on Title I
chattel loans ranged around 7 to 8 percent in recent years. These rates
may appear high in comparison to interest rates for site-built homes
with fixed rate, 30-year mortgages. However, the Title I rates are
relatively low compared to those for conventional chattel loans, which
were reported to be in the 7 to 13 percent range in early 2015.\30\
---------------------------------------------------------------------------

\28\ This was one of the higher claim rates in recent years.
\29\ See Office of Management and Budget, Federal Credit
Supplement--Budget of the U.S. Government, Fiscal Year 2017, p. 14
(Table 4) (2016) [hereinafter cited ``OMB Forecast''], available at
https://www.whitehouse.gov/sites/default/files/omb/budget/fy2017/assets/cr_supp.pdf.
\30\ See Paola Iuspa, ``Refinancing mobile home loan at lower
rate,'' Bankrate.com (Jan. 23, 2015), available at http://www.bankrate.com/finance/refinance/refinancing-mobile-home-loan.aspx. One researcher found that at the middle of 2012, chattel
financing rates were typically at 15 percent. See Darla Hailey,
``Mobile Home Decommissioning and Replacement Research in the
Pacific Northwest,'' p. 7 (Sept. 2016), available at https://rtf.nwcouncil.org/subcommittee/small-and-rural-utility-rtf-technical-support-subcommittee.
---------------------------------------------------------------------------

FHFA expects that the Enterprises, in pursuing a chattel loan pilot
initiative, would significantly build on the data available through
FHA's Title I program by partnering with manufactured housing lenders
to access performance data on chattel loans, including, where possible,
for chattel loans currently held in portfolio by lenders that serve
this market.
As the Enterprises develop information about chattel loan
performance, FHFA expects that this would impact Enterprise decisions
on how to appropriately price these loans. On this point, a trade
association for the manufactured housing industry suggested charging
appropriate loan level price adjustments and guarantee fees as possible
conditions for chattel initiatives by the Enterprises. The pricing on
the FHA Title I program has resulted in a projected 4 percent surplus
over its expected costs.\31\ Also, loan modifications for some
borrowers have been one way to allow them to stay in their homes and,
at the same time, mitigate losses to lenders. Part of the assessment of
the performance of chattel loans would include analysis of available
loan modification efforts.
---------------------------------------------------------------------------

\31\ See OMB Forecast, p. 6 (Table 2) (2016), available at
https://www.whitehouse.gov/sites/default/files/omb/budget/fy2017/assets/cr_supp.pdf.
---------------------------------------------------------------------------

Risk Mitigants. In designing a chattel loan pilot initiative, FHFA
would also expect the Enterprises to incorporate appropriate risk
mitigants into the pilot design. In addition to limiting the volume or
duration of the chattel loan pilot initiative, one type of risk
mitigant could be to tighten underwriting requirements for credit
scores, down

[[Page 96253]]

payments, loan-to-value ratios (LTV), debt-to-income ratios, and
borrower reserves. Another risk mitigant could be having chattel loans
purchased by the Enterprises secured not only by a lien on the title to
the home, but also by a lien on the underlying land, as one
manufactured housing trade association suggested. Additionally, loan
modifications for some borrowers have been one way to allow them to
stay in their homes and, at the same time, mitigate losses to lenders.
Credit enhancements that share credit risk with private investors
are an additional risk mitigant, although the Enterprises would need to
develop counterparty relationships and approaches tailored for these
loans. None of the Enterprises' approved mortgage insurer
counterparties currently offers mortgage insurance for chattel loans,
and bond insurance is also unavailable.
The Enterprises could require loan sellers to repurchase the loan
or retain a participation of at least ten percent in the loan to meet
the requirements of the Enterprises' charter acts.\32\
---------------------------------------------------------------------------

\32\ See generally 12 U.S.C. 1717(b)(1) (Fannie Mae Charter
Act); 12 U.S.C. 1454(a)(1) (Freddie Mac Charter Act).
---------------------------------------------------------------------------

In pursuing such an approach, the Enterprises would need to
consider the financial strength of the counterparty, which would be an
important factor in assessing the total credit risk of a transaction.
Additionally, as the Enterprises work to develop loan performance data,
the Enterprises could explore developing credit risk transfer
approaches specific to chattel loans, separate from the credit
enhancement requirements of the charter acts.
FHFA would assess these and any other risk mitigants included by an
Enterprise in a proposed chattel loan pilot before the Enterprise could
begin any loan purchases.
Borrower and Tenant Protections. Before approving any chattel loan
purchases by the Enterprises, FHFA would also expect the Enterprises to
require meaningful borrower and tenant protections beyond those
required under current law. As one regulatory agency commented, chattel
loan borrowers are subject to increased risks due to the lack of
borrower and tenant protections for chattel loans. The relative lack of
consumer protections, compared to those households with a manufactured
home titled as real estate, was also discussed at length in the
proposed rule. The main protections for real estate mortgage borrowers,
which chattel loan borrowers lack, are those afforded by the Real
Estate Settlement Procedures Act (RESPA), which prohibits inappropriate
kickbacks, requires disclosures of settlement costs, and requires
proper loan servicing.\33\ The proposed rule described potential
difficulties in replicating RESPA-like protections for chattel loan
borrowers.\34\ A number of manufactured housing trade associations
commented in favor of adding these protections for chattel loan
borrowers. Several nonprofit organizations suggested that housing
counseling be required for chattel loan borrowers, although another
nonprofit organization pointed out that there is a shortage of
counselors with training in manufactured housing. FHFA is also
concerned about a lack of tenant protections in the pad leases for
chattel borrowers whose homes are located on leased land.
---------------------------------------------------------------------------

\33\ See generally 12 U.S.C. Ch. 27; Consumer Financial
Protection Bureau, ``CFPB Consumer Laws and Regulations--RESPA''
(Apr. 2015), available at http://files.consumerfinance.gov/f/201503_cfpb_regulation-x-real-estate-settlement-procedures-act.pdf.
\34\ See 80 FR at 79190 (Dec. 18, 2015).
---------------------------------------------------------------------------

FHFA expects that the Enterprises would seek feedback from
stakeholder groups about how best to design the borrower and tenant
protections for any chattel loan pilot initiative. This approach will
provide important input on how the Enterprises should balance providing
appropriate borrower and tenant protections with designing the pilot in
a way that is operationally feasible for the Enterprises and their
counterparties.
Preparations for Loan Purchases. FHFA understands that the
Enterprises would need to expend substantial effort and would incur
non-trivial costs prior to implementing a chattel loan pilot
initiative.\35\ As discussed above concerning access to better
financial performance data, Enterprise research and development efforts
would need to precede any purchases of chattel loans, including
developing expertise, designing pilot parameters, reviewing potential
counterparties, researching investors and securities structures, and
developing appropriate borrower and tenant protections to be integrated
as counterparty requirements. Enterprise counterparties would also need
to be prepared to accurately report their chattel loan data and to
adopt strong compliance and internal auditing standards.
---------------------------------------------------------------------------

\35\ Regarding the difficulties involved in establishing an
Enterprise pilot for chattel loans, see generally Titus Dare, ``A
Deeper Look at why the GSEs say no to Securitizing Chattel Loans,''
MHProNews (May 24, 2016), available at http://www.mhmarketingsalesmanagement.com/blogs/industryvoices/tag/titus-dare/.
---------------------------------------------------------------------------

The final rule, therefore, allows for a wide range of Enterprise
activities supporting chattel loans to be eligible for Duty to Serve
credit. For example, Enterprise outreach to potential counterparties
could count under the outreach evaluation area, and Enterprise research
and development could count under the outreach evaluation area or the
loan product evaluation area even where it does not result in actual
purchases of chattel loans by the Enterprise. The Enterprises'
publication of their research and findings could benefit the entire
manufactured housing market, which could also work to further liquidity
in this market.
Request for Information (RFI). In light of the many considerations
that the Enterprises would need to make in designing and proposing a
chattel pilot initiative, FHFA has determined to issue an RFI to the
public on what an Enterprise should include in a chattel pilot
initiative, if an Enterprise decides to pursue a pilot initiative. FHFA
has determined that the RFI will conclude in time for the Enterprises
to consider the input from the RFI in any chattel pilot initiative that
may be included in an Enterprise's draft Plan.
(ii) Manufactured Homes Titled as Real Property--Sec. 1282.33(c)(1)
Consistent with the proposed rule, Sec. 1282.33(c)(1) of the final
rule establishes a Regulatory Activity for Enterprise support of
financing for manufactured homes titled as real property.
A wide range of commenters asserted that there is a need for
Enterprise support for this market. Manufactured housing industry
commenters stated that while real estate-titled homes are a smaller
part of the manufactured housing market than chattel-titled homes,
there are changes the Enterprises could make to assist this market. A
manufactured housing trade association suggested that Enterprise
guarantee fees for loans on real estate-titled homes be comparable to
those for loans on site-built homes. The commenter also recommended
that a number of terms and conditions of the Enterprises' mortgage
products for real estate-titled homes be modified, such as financing of
property damage insurance, liberalizing the LTV requirements, and
financing pre-HUD Code homes in some instances.
Except for the general requirements applicable to all single-family
loan purchases, the final rule does not incorporate commenters'
specific suggestions regarding the terms and conditions for mortgages
on real estate-titled homes purchased by the

[[Page 96254]]

Enterprises. These suggestions are more appropriate to be raised by the
commenters directly with the Enterprises during the development and
implementation of the Enterprises' Plans.\36\
---------------------------------------------------------------------------

\36\ Commenters in a number of circumstances addressed
individual underwriting recommendations. As noted throughout, FHFA
encourages the Enterprises to consider this feedback, although FHFA
also notes that this should not be construed as an endorsement by
FHFA of those comments and FHFA will review any underwriting
guidelines as part of its review of Enterprise Plans for Non-
Objection.
---------------------------------------------------------------------------

The proposed rule specifically requested comment on whether Duty to
Serve credit for real estate-titled manufactured homes should be
limited to certain situations, such as when refinancing borrowers with
excessive interest rates.\37\ A wide variety of commenters opposed any
limitations on Duty to Serve credit for real estate-titled homes
because of the shortage of funding for manufactured housing overall and
the acute housing needs of lower-income borrowers. FHFA is persuaded by
these comments and has not included any such limitations in the final
rule.
---------------------------------------------------------------------------

\37\ See 80 FR at 79190 (Dec. 18, 2015).
---------------------------------------------------------------------------

FHFA notes that mortgages on real estate-titled manufactured homes
generally perform well. The borrowers for these homes are subject to
the same consumer protections as borrowers for site-built homes, and
the housing is affordable relative to site-built housing. In addition,
the Enterprises already have an infrastructure in place for purchasing
and servicing mortgages on real estate-titled manufactured homes.
(iii) Manufactured Housing Communities--Sec. 1282.33(c)(3)
Section 1282.33(c)(3) of the final rule establishes the following
Regulatory Activities for Enterprise support for manufactured housing
communities, with some modifications from the proposed rule: (1)
Support for blanket loans on government-, nonprofit-, or resident-owned
manufactured housing communities, and (2) support for blanket mortgages
on manufactured housing communities with minimum tenant protections in
the pad leases. The definition of ``manufactured housing community'' in
Sec. 1282.1 of the final rule remains unchanged from the proposed
rule--a tract of land under unified ownership and developed for the
purpose of providing individual rental spaces for the placement of
manufactured homes for residential purposes within its boundaries.
The final rule does not allow additional Duty to Serve credit where
a manufactured housing community qualifies under both Regulatory
Activities because government-, nonprofit-, or resident-owned owned
communities are likely to already have meaningful tenant pad lease
protections.
Freddie Mac supported Duty to Serve credit for activities that
generally support affordable manufactured housing communities, without
limiting eligibility to the specific Regulatory Activities in the
proposed rule, stating that this would be consistent with Congressional
intent.
A manufactured housing trade association opposed any Duty to Serve
credit for Enterprise support for manufactured housing communities,
maintaining that manufactured home communities are not an underserved
market and do not address the critical challenge for homeowners, which
is affordable financing for chattel-titled manufactured homes
facilitated by a strong Enterprise secondary market. Two state trade
associations for the manufactured housing industry similarly opposed
Duty to Serve credit for manufactured housing community loans and
preferred that the Enterprises focus on manufactured home loans.
As further discussed below, the final rule retains two of the
proposed Regulatory Activities, with some modifications, but does not
include the third proposed Regulatory Activity for Enterprise support
for financing small manufactured housing communities.
(a) Small Manufactured Housing Communities
In a change from the proposed rule, the final rule does not include
Enterprise support for the financing of blanket loans on small
manufactured housing communities (communities with 150 or fewer pads)
as a Regulatory Activity. As discussed in the SUPPLEMENTARY INFORMATION
to the proposed rule, this Regulatory Activity was proposed because the
Enterprises' purchases to date had tended to be for loans on larger
manufactured housing communities, and existing funding for smaller
communities was likely to have variable interest rates and balloon
payments at the end of the mortgage term.
Few commenters specifically addressed this proposed Regulatory
Activity. A trade association supported the proposed Regulatory
Activity because the need for financing in this market is for the older
or rural communities that tend to be smaller in size. The commenter
further suggested that the Enterprises develop prudent underwriting
standards that would expand Enterprise loan purchases beyond higher-end
communities. In addition, the commenter suggested that the Enterprises
collect, analyze, and publish data on manufactured housing communities,
in order to develop investor interest. The commenter advised that this
would improve liquidity and lower the costs to borrowers. A state
housing finance agency supported the proposed Regulatory Activity,
stating that small communities need the most financing assistance. A
manufactured housing community investor and consultant also supported
the proposed Regulatory Activity without providing a rationale.
A larger number of commenters opposed the proposed Regulatory
Activity. For example, a policy advocacy organization opposed basing a
Regulatory Activity on the size of a community, stating that while it
is reasonable to assume that smaller manufactured housing communities
face greater challenges in attracting capital than larger communities,
the Enterprises already support financing of smaller communities. The
commenter instead favored Enterprise support for manufactured
communities located in geographies with greater needs, such as high-
cost areas where manufactured housing community preservation would
secure affordable housing for many years. The commenter asserted that
of the three proposed Regulatory Activities for manufactured housing
communities, the Enterprises would favor serving smaller communities
because it would be the easiest Regulatory Activity to pursue.
Most other commenters who addressed the proposed Regulatory
Activities for manufactured housing communities also saw no particular
need for targeted Enterprise support for the small manufactured
community submarket. The commenters said that there is no correlation
between the size of a community and the affordability it provides to
residents with limited financial means. A trade association for owners
of manufactured homes opposed the proposed Regulatory Activity,
commenting that the number of pads in a community is less relevant than
the need to provide tenant protections. In addition, a trade
association for the manufactured housing industry and a state housing
finance agency expressed doubts about conditioning access to Duty to
Serve credit on the size of the manufactured housing community. Neither
Enterprise supported the proposed Regulatory Activity, although Freddie
Mac favored service to this market as an ``Additional Activity.''
Freddie Mac stated that very small manufactured housing communities
have a higher chance of being below

[[Page 96255]]

investment grade and that there are economy of scale difficulties with
small communities. Freddie Mac also stated that 25 percent of its
blanket loan portfolio is loans on communities with fewer than 150
pads. An academician stated that the proposed Regulatory Activity would
encourage service to the least efficient sector of the market. In the
SUPPLEMENTARY INFORMATION to the proposed rule, FHFA noted that blanket
loans for smaller manufactured housing communities are frequently
originated by local banks or credit unions and held in portfolio. FHFA
did not receive comment letters from community banks or credit unions
indicating support for or opposition to this proposed Regulatory
Activity.
After considering the comments, it appears that this proposed
Regulatory Activity would provide relatively less assistance to the
very low-, low-, and moderate-income families targeted for assistance
by the Duty to Serve, as compared with the two Regulatory Activities
for manufactured housing communities retained in the final rule.
Nevertheless, if an Enterprise proposed support for smaller
manufactured housing communities as a qualifying Additional Activity
and provided detailed information on a targeted market need, FHFA would
consider it in reviewing the Enterprise's Plan.
(b) Manufactured Housing Communities Owned by Government Units or
Instrumentalities, Nonprofits, or Residents--Sec. 1282.33(c)(3)
Consistent with the proposed rule, Sec. 1282.33(c)(3) of the
final rule establishes a Regulatory Activity for Enterprise support for
mortgages on manufactured housing communities owned by government units
or instrumentalities, nonprofits, or residents. The final rule defines
``resident-owned manufactured housing community'' as a manufactured
housing community for which the terms and conditions of residency,
policies, operations, and management are controlled by at least 51
percent of the residents, either directly or through an entity formed
under the laws of the state. FHFA has changed the percentage of
residents in this definition from 50 percent in the proposed rule to 51
percent in the final rule so that control by a majority of the
residents would be required for the community to be eligible for
credit, as Fannie Mae suggested in its comment letter.
A number of policy advocacy organizations and nonprofit
organizations supported this proposed Regulatory Activity because these
types of communities play a key role in preserving sustainable
manufactured housing communities and also tend to be safer investments.
A nonprofit organization stated that lot rents in resident-owned
communities remain affordable following the residents' purchase of the
communities.
Several manufactured housing trade associations opposed the
proposed Regulatory Activity, as well as any other Regulatory Activity
for manufactured housing communities, based on the view that support
for manufactured housing communities would not carry out the Duty to
Serve mandate. For instance, one commenter objected to the type of
ownership of a manufactured housing community affecting access to
capital, and stated that government-owned manufactured housing
communities should not have easier access to Enterprise support than
other types of manufactured housing communities.
FHFA has determined that making Enterprise support for
manufactured housing communities owned by government units or
instrumentalities, nonprofits, or residents eligible for Duty to Serve
credit is consistent with the Enterprises' Duty to Serve
responsibilities because these types of communities typically serve
lower-income residents, remain residential communities, promote fair
treatment of tenants, and help preserve permanent affordability for
their residents.\38\ One study found that residents of resident-owned
communities ``have consistent economic advantages over their
counterparts in investor-owned communities, as evidenced by lower lot
fees, higher average home sales prices, faster home sales, and access
to fixed rate home financing.'' \39\ Although government-, nonprofit-,
and resident-owned communities currently make up a very small portion
of the overall manufactured housing community market, more active
support by the Enterprises for communities with these types of
ownership structures could encourage more communities to convert to
these forms of ownership. Accordingly, consistent with the proposed
rule, the final rule establishes a Regulatory Activity for Enterprise
support for financing manufactured housing communities owned by
government units or instrumentalities, nonprofits, or residents.
---------------------------------------------------------------------------

\38\ See generally Millennium Housing--Mission Statement,
available at http://www.millenniumhousing.net/#Mission_Statement.
\39\ Sally K. Ward, Charlie French & Kelly Giraud, ``Resident
Ownership in New Hampshire's `Mobile Home Parks:' A Report on
Economic Outcomes'' (rev. 2010), available at http://scholars.unh.edu/cgi/viewcontent.cgi?article=1009&context=carsey.
---------------------------------------------------------------------------

(c) Manufactured Housing Communities With Specified Minimum Tenant Pad
Lease Protections--Sec. 1282.33(c)(4)
Section 1282.33(c)(4) of the final rule establishes a Regulatory
Activity for Enterprise support for blanket loans on manufactured
housing communities that have certain specified minimum pad lease
protections for tenants. These protections address renewable lease
terms, rent increases and payments, unit sale and sublease rights, and
advance notice of a planned sale or closure of the community. The final
rule incorporates several modifications to the tenant protections in
the proposed rule. By establishing this Regulatory Activity, FHFA seeks
to encourage manufactured housing communities to adopt pad lease
protections for tenants, or enhance existing pad lease protections. The
minimum pad lease protections in the final rule are:

One-year renewable lease term unless there is good cause
for nonrenewal;
30-day written notice of rent increases;
5-day grace period for rent payments, and the right to
cure defaults on rent payments; and
Right of tenants to:
(A) Sell the manufactured home without having to first relocate it
out of the community;
(B) Sublease the home or assign the pad lease for the unexpired
term to the new buyer of the tenant's manufactured home without any
unreasonable restraint;
(C) Post ``For Sale'' signs;
(D) Sell the manufactured home in place within a reasonable time
period after eviction by the manufactured housing community owner; and
(E) Receive at least 60 days advance notice of a planned sale or
closure of the manufactured housing community.

The final rule changes the proposed rule by: (1) Clarifying that
Enterprise support of financing of manufactured housing communities
located in jurisdictions with laws providing tenants with equal or
greater protections than those specified in the rule is eligible for
Duty to Serve credit; (2) making the pad lease protections available to
tenants at all times and not only in cases of default on rent payments;
(3) reducing the advance notice period for planned sale or closure of
the community from 120 days to 60 days; and (4) not including the
proposed provisions on bona fide offers of sale of the community. The
changes are discussed further in the sections below.

[[Page 96256]]

As discussed in the SUPPLEMENTARY INFORMATION to the proposed rule,
the final rule does not impose requirements on sellers and servicers to
oversee manufactured housing community owners' compliance with the pad
lease protections. Also, consistent with the approach in the proposed
rule, the final rule does not require that covenants in the blanket
loan documents for the manufactured housing community provide that
noncompliance by community owners with the pad lease protections
constitutes an event of default. Instead, tenants would need to file
private lawsuits to remediate any landlord noncompliance with the lease
provisions.
Both Enterprises commented that manufactured housing communities
that do not have the proposed pad lease protections are able to obtain
financing without Enterprise support. This is due to the current strong
market for manufactured housing community financing.\40\ A policy
advocacy organization that supported having strong tenant protections
as a concept also expressed concern that requiring tenant protections
could deter community owners from selling their loans to the
Enterprises. FHFA notes that this Regulatory Activity would not require
the owner of a manufactured housing community to agree to these lease
provisions as a condition of selling its loan to an Enterprise.
However, if an Enterprise decided to include this Regulatory Activity
in its Plan, the Enterprise could receive Duty to Serve credit for
those transactions with community owners who did adopt the specified
lease provisions. FHFA would take into consideration market competition
and the relative difficulty of encouraging community owners to adopt
these lease provisions in assessing Duty to Serve credit.
---------------------------------------------------------------------------

\40\ See generally Tony Petosa, Nick Bertino & Erik Edwards,
``Wells Fargo Multifamily Capital, Manufactured Home Community
Financing Handbook,'' pp. 5-8 (10th ed., 2d Qtr. 2016). See Peter
Grant, ``Singapore's Sovereign-Wealth Fund Is in Talks to Buy
Manufactured-Home Owner,'' Wall Street Journal (June 28, 2016)
(``Well-capitalized private equity and publicly traded REITs are
eager to acquire these properties.''), available at http://www.wsj.com/articles/singapores-sovereign-wealth-fund-is-in-talks-to-buy-manufactured-home-owner-1467106203. For a discussion of the
high desirability of manufactured housing communities as an
investment, see generally Nancy Olmsted, Marcus & Millichap,
``Investors Competing for Limited Supply of Manufactured Home
Communities,'' First Half 2015, Manufactured Housing Research Report
(2015).
---------------------------------------------------------------------------

A number of commenters addressed the specific tenant pad lease
protections in the proposed rule. Commenters clustered into two groups,
with most manufactured housing industry commenters and the Enterprises
opposing the proposed pad lease protections, and most consumer advocacy
groups favoring even stronger pad lease protections. The manufactured
housing industry commenters opposed the pad lease protections because
the industry prefers a funding option unconstrained by pad lease
protection requirements. The Enterprises also opposed pad lease
protections on the grounds that tenant protections are better handled
by the state legislatures.
Policy advocacy organizations and nonprofit organizations supported
having tenant pad lease protections, either as a stand-alone Regulatory
Activity, or as an eligibility requirement for all manufactured housing
community loans purchased by the Enterprises. One policy advocacy
organization supported the Enterprises' developing a standardized lease
containing pad lease protections, and urged that it include free speech
rights and rights of association.
A manufactured housing tenants' organization recommended that FHFA
adopt the pad lease protections contained in the American Association
of Retired Persons (AARP) Model Act.\41\ The commenter further advised
that 14 states lack any pad lease protection laws for manufactured
housing community tenants. The commenter expressed concern that states
might adopt FHFA's proposed pad lease protections as a ceiling on
tenant protections rather than as the minimum baseline that FHFA
intended. A policy advocacy organization stated that the Enterprises
should use their market influence to support the proposed pad lease
protections or those in state or local laws, whichever are more
protective.
---------------------------------------------------------------------------

\41\ See generally Carolyn L. Carter, Odette Williamson,
Elizabeth DeArmond & Jonathan Sheldon, ``Manufactured Housing
Community Tenants: Shifting the Balance of Power--A Model State
Statute,'' AARP Public Policy Institute (Rev. Ed. 2004),
[hereinafter cited ``AARP Model Act''], available at http://assets.aarp.org/rgcenter/consume/d18138_housing.pdf.
---------------------------------------------------------------------------

A state housing finance agency recommended including safeguards in
the final rule against large rent increases in manufactured housing
communities. In developing this Regulatory Activity, FHFA sought to
address the most concerning reported practices in designing the tenant
pad lease protections for the proposed and final rule \42\ and has
determined that wholesale adoption of the AARP Model Act into tenant
lease protections in the final rule would not be practical. However,
after considering the comments, FHFA has determined that certain
modifications and clarifications to the proposed tenant lease
protections should be made in the final rule, which are discussed
below.
---------------------------------------------------------------------------

\42\ See generally Darren Cunningham, ``Another Mobile Home
Tenant Facing $25k Lawsuit After Selling Her Own Home,'' Fox17online
(Apr. 7, 2014) (Web site), available at http://fox17online.com/2014/04/07/another-mobile-home-tenant-sued-for-25k-after-selling-her-own-home/.
---------------------------------------------------------------------------

Equivalent Pad Lease Protection Laws. The SUPPLEMENTARY INFORMATION
to the proposed rule stated that where a jurisdiction has laws
requiring certain pad lease protections for manufactured housing
communities that are equal to or greater than the minimum pad lease
protections in the proposed rule, communities in those jurisdictions
would be eligible for Duty to Serve credit under the proposed
Regulatory Activity. The text of the proposed rule referred to the
protections as ``minimum'' protections. Some commenters apparently
misunderstood this reference and stated that there could be conflicts
between the proposed pad lease protections and state and local pad
lease protection laws. Some manufactured housing community owners
expressed concern about the impact of the proposed pad lease
protections because they perceived conflicts between these requirements
and state and local laws, and stated that it would be inappropriate to
condition financing on these requirements.
FHFA did not intend that the minimum pad lease protections in the
proposed rule be a suggested ceiling for pad lease protections to be
adopted by states or localities. Instead, FHFA intends that the pad
lease protections finalized here act as a floor for tenant protections
in manufactured housing communities. The final rule clarifies this by
stating explicitly that manufactured housing communities in
jurisdictions with laws providing tenants with equal or greater pad
lease protections than those specified in the Regulatory Activity are
eligible for Duty to Serve credit.
Right to Sell Manufactured Homes and Sublease or Assign Pad Leases.
The proposed rule would have provided that upon a default by tenants on
their rent payments, the tenants would have the right to: (1) Sell
their home without having to first relocate it out of the community;
(2) post ``For Sale'' signs; (3) sublease or assign their pad lease for
the unexpired term without unreasonable restraint; and (4) sell their
home within a reasonable period of time after eviction. The final rule
makes these protections available to tenants at all times regardless of
whether they have defaulted on their rent payments.

[[Page 96257]]

A manufactured housing industry consultant supported the proposed
right for tenants to be able to sell their homes in place and advertise
the sale. The commenter stated, however, that after eviction of a
tenant, the trial court judge usually determines a reasonable period of
time for the tenant to sell the home. The commenter further noted that
most leases in the Midwest are verbal, month-to-month leases, with most
tenants declining a written lease.
Advance Notice Period for Planned Sale or Closure of Community.
Under the proposed rule, tenants would have had the right to receive at
least 120 days advance notice of a planned sale or closure of the
community, within which time the tenants, or an organization acting on
behalf of a group of tenants, may match any bona fide offer of sale,
and the community owner must consider the tenants' offer and negotiate
with them in good faith.
Some manufactured housing trade organizations opposed a right for
advance notice to tenants of a planned sale of the community except
when the sale involves a change in land use. In their view, the sale of
the property does not harm tenants because their leases simply transfer
to the new owner.
With one exception, commenters did not specifically address the
length of the proposed advance notice period. The exception was a
policy advocacy organization that conducted a review of the
manufactured housing community laws in all 50 states. The commenter
reported that only Vermont and Connecticut have a 120-day advance
notice period, that Florida, Massachusetts, and Rhode Island have a 45-
day ``purchase opportunity'' period, and that Oregon has a 25-day
advance notice period. The commenter concluded that the proposed 120-
day advance notice to tenants is too long and that the other state
advance notice periods are effective.
FHFA also considered the AARP Model Act, which provides for a 90-
day advance notice period for the sale of a community.\43\ The 90-day
period is extended by an additional 180 days where a tenant association
provides timely notice to the community owner of its intent to purchase
the community.\44\ The AARP Model Act provides a two-year advance
notice period for a change in use (i.e., closing) of a community.\45\
---------------------------------------------------------------------------

\43\ See AARP Model Act, Sec. 113(b).
\44\ See id. at Sec. 113(c).
\45\ See id. at Sec. 112(b).
---------------------------------------------------------------------------

Based on the commenter's states survey and the AARP Model Act, FHFA
is persuaded to change the proposed 120-day advance notice period in
the final rule. In view of the wide range of advance notice periods
among the states and to balance the needs of tenants with the needs of
community owners, the final rule adopts a minimum advance notice period
of 60 days. In application, the final rule makes it possible for the
60-day advance notice period and the expiration of the last pad lease
term then in effect to expire on the same day.
Tenants' Right of First Refusal. A ``right of first refusal'' is a
right in a contract where the seller must give the other party an
opportunity to match the price offer that a third party has made to buy
a certain asset.\46\ Several manufactured housing trade associations
mistakenly believed that the proposed Regulatory Activity included a
right of first refusal for the tenants to purchase their manufactured
housing communities where the communities are being sold or closed. The
proposed rule did not include a right of first refusal for tenants.
Rather, the proposed rule stated that the ``community owner shall
consider the tenants' offer and negotiate with them in good faith.''
\47\ (emphasis added)
---------------------------------------------------------------------------

\46\ See The Law Dictionary (Black's Law Dictionary Free Online
Legal Dictionary, 2d Ed.) (Web site), available at http://thelawdictionary.org/right-of-first-refusal/.
\47\ 80 FR at 79217 (2015).
---------------------------------------------------------------------------

Many policy advocacy organizations favored including a tenants'
right of first refusal in the Regulatory Activity, stating that the
absence of such a right is a fundamental risk to tenants.
In contrast, several manufactured housing trade associations stated
that a tenants' right of first refusal would limit community owners'
ability to finance and sell their communities and would expose the
Enterprises as investors.
After considering the comments, FHFA has determined that
incorporating a tenants' right of first refusal in this Regulatory
Activity would add an overly expansive role for the Enterprises and
potentially involve significant implementation issues.\48\ Accordingly,
consistent with the proposed rule, the final rule does not include a
tenants' right of first refusal in the Regulatory Activity.
---------------------------------------------------------------------------

\48\ See generally Matthew Silver, ``Lawsuit Attempts to Block
Sale of Manufactured Home Community,'' MHProNews (July 5, 2016),
available at http://www.mhmarketingsalesmanagement.com/blogs/daily-business-news/lawsuit-attempts-to-block-sale-of-manufactured-home-community/; David I. Walker, ``Rethinking Rights of First Refusal,''
p. 5 Stan. J.L. Bus. & Fin. 1 (1999); Joshua Stein, ``Why Rights of
First Offer and Rights of First Refusal Don't Work'' (Nov. 26,
2013), available at https://commercialobserver.com/2013/11/why-rights-of-first-offer-and-rights-of-first-refusal-dont-work/.
---------------------------------------------------------------------------

Negotiation of Community Sale. Under the proposed rule, as part of
the pad leases protections, the tenants, or an organization acting on
behalf of a group of tenants, would have the right to match any bona
fide offer for sale, and the community owner would be required to
consider the tenants' offer and negotiate with them in good faith. FHFA
has determined that it is not necessary for the rule to specify a right
for the tenants to make an offer to purchase their community, as this
right exists irrespective of the Duty to Serve. FHFA also determined
that, while state laws and the AARP Model Act \49\ may specify tenant
purchase rights, it is not feasible to include them in pad leases.
---------------------------------------------------------------------------

\49\ See AARP Model Act, sec. 113(b), (e).
---------------------------------------------------------------------------

(d) Determining Affordability of Manufactured Housing Communities--
Sec. 1282.38(f)
The Safety and Soundness Act provides that Duty to Serve activities
must be for very low-, low-, and moderate-income families. Manufactured
housing community owners and loan sellers are unlikely to know the
incomes of all of the community residents at the time a blanket loan on
the community is sold to an Enterprise. Thus, in order for an
Enterprise's purchase of the loan to be eligible to receive Duty to
Serve credit, an alternative to requiring the Enterprises to obtain the
incomes of the community residents is needed. FHFA has previously
established a methodology in 12 CFR 1282.19 for determining
affordability under the Enterprises multifamily affordable housing
goals that uses the tenants' total monthly housing costs (rent payments
plus utility costs, adjusted for number of bedrooms) instead of their
incomes.\50\ That methodology will also be used generally for
determining the affordability of multifamily properties for Duty to
Serve purposes. However, the methodology cannot be used where the total
monthly housing costs of the residents are not known to the property
owners or the loan sellers. For manufactured housing communities, the
total monthly housing costs of the residents (note payments on
manufactured home plus pad rent payments plus utility costs, adjusted
for bedroom size) are generally not known to the owners of the
community or the loan sellers.
---------------------------------------------------------------------------

\50\ See 12 CFR 1282.15(d)(1), 1282.19.
---------------------------------------------------------------------------

Accordingly, to determine the affordability of manufactured housing
communities under the Duty to Serve, Sec. 1282.38(f) of the final rule
provides that, unless otherwise determined by

[[Page 96258]]

FHFA, the affordability of homes in the community shall be determined
using one of the two methodologies discussed below, as applicable, as a
proxy for the number of homes in the community that are affordable,
except that for purposes of determining extra Duty to Serve credit for
residential economic diversity activities or objectives, the
methodology in paragraph (f)(2) may not be used:
(1) Methodology for government-, nonprofit- or resident-owned
manufactured housing communities. Section 1282.38(f)(1) of the final
rule provides that, for a manufactured housing community owned by a
government unit or instrumentality, a nonprofit organization, or the
residents, if laws or regulations governing the affordability of the
community, or the community's or ownership entity's founding,
chartering, governing, or financing documents, require that a certain
number or percentage of the community's homes be affordable consistent
with paragraph (d)(1) of Sec. 1282.38, then any homes subject to such
affordability restriction are treated as affordable for Duty to Serve
purposes.
The proposed rule text did not include this methodology but
specifically requested comment on whether governing or financing
documents for the community could provide a proxy for resident incomes.
For those communities that are owned by government units or
instrumentalities, the proposed rule asked whether regulations,
handbooks, or financing documents specifying income criteria for the
residents would be an appropriate indicator of tenant incomes. For
those communities that are nonprofit-owned and resident-owned
communities, the proposed rule asked whether the founding documents for
the community, which describe its mission as serving lower-income
families, or financing agreements or other documents from funding
sources specifying the required income levels of intended
beneficiaries, would be appropriate indicators of tenant incomes. The
proposed rule also asked whether there is any comparable documentation
that could be applicable to communities with for-profit owners (e.g.,
where they have accepted income restrictions in order to accept Section
8 vouchers).
These questions received few comments. A nonprofit organization
stated that governing or financing documents would provide a good proxy
for the incomes of residents in limited equity cooperatives (i.e.,
resident-owned communities) because the land is preserved over the long
term for manufactured housing, and home sales prioritize low-income
buyers for purchases. An organization that assists in financing
resident-owned communities also favored this methodology, although it
stated that all resident-owned communities should be deemed income-
qualifying under the Duty to Serve regardless of any income
documentation. Neither Enterprise commented on the questions.
FHFA has considered the comments and is persuaded that manufactured
housing communities owned by government units or instrumentalities,
nonprofits, or residents generally are driven by public missions to
provide affordable homes to very low-, low-, and moderate-income
households, consistent with the purposes of the Duty to Serve.
Accordingly, FHFA has determined that it is reasonable to rely on these
entities' or communities' founding, chartering, governing, or financing
documents as proxies for affordability of homes in the community where
the documents contain restrictions that require affordability of homes
to the income groups targeted by the Duty to Serve. A manufactured
housing community will also be considered affordable to the income
groups targeted by the Duty to Serve if laws or regulations governing
the community require that it be affordable to such income groups.
To facilitate Enterprise support for financing for the types of
communities discussed above, the final rule provides the Enterprises
with the option of using either this methodology or the census tract
methodology discussed below.
(2) Census tract methodology for any type of manufactured housing
community. Section 1282.38(f)(2) of the final rule provides that for
any type of manufactured housing community, except for purposes of
determining extra credit for residential economic diversity activities
or objectives,\51\ the affordability of the homes in the community is
determined as follows:
---------------------------------------------------------------------------

\51\ Estimating affordability under Sec. 1282.38(f)(2) assumes
that a community's affordability mirrors the income characteristics
of the tract in which it is located, which is not useful for
determining whether the community contributes to residential
economic diversity.
---------------------------------------------------------------------------

(A) If the median income of the census tract in which the
manufactured housing community is located is less than or equal to the
area median income, then all homes in the community are treated as
affordable;
(B) If the median income of the census tract in which the
manufactured housing community is located exceeds the area median
income, then the number of homes that are treated as affordable is
determined by dividing the area median income by the median income of
the census tract in which the community is located and multiplying the
resulting ratio by the total number of homes in the community.
Consistent with the proposed rule, Sec. 1282.38(f)(2) of the final
rule includes a methodology that uses the median income of the census
tract in which the community is located, as determined by FHFA, to
proxy for the incomes of the community's residents. This methodology is
available regardless of the type of ownership structure of the
community.
As an example of the second scenario, if the area median income is
$100,000, the census tract's median income is $125,000, and the number
of homes in the community is 100, the number of homes treated as
affordable is:

Step 1: $100,000 / $125,000 = 80%
Step 2: 80% x 100 = 80 (number of homes treated as affordable)

The final rule adopts the proposed census tract methodology's first
step for determining the appropriate ratio of the area median income to
the census tract median income. The second step in the final rule
multiplies that ratio by the total number of homes in the community.
This is a change from the proposed rule where step 2 would have
multiplied the step 1 ratio by the unpaid principal balance of the
blanket loan.
Duty to Serve credit under the loan purchase evaluation area is
generally measured based on the number of dwelling units affordable to
very low-, low-, and moderate-income families. Measuring credit for
purchases of blanket loans on manufactured housing communities based on
the number of homes in the community rather than on the unpaid
principal balance is not a substantive change because it will not
affect the proportion of each community that is treated as affordable.
Measuring based on the number of homes is more consistent with the
evaluation methods for other types of mortgage purchases, and it will
permit easier comparisons of volumes across different mortgage
purchases under the Duty to Serve.
Several commenters addressed the proposed census tract methodology.
A policy advocacy organization favored the methodology, describing it
as simple and reasonable. A trade association also supported the
methodology, but preferred that a matrix with parameters tailored to
accommodate family stresses like major medical expenses be added.
A manufactured housing tenants' organization opposed the
methodology on the basis that it would not work well if the
manufactured housing community is located in more affluent areas or in

[[Page 96259]]

commercial areas. A state housing finance agency stated that the
methodology is flawed because census tract, American Community Survey,
and HUD area median income data may not be a good proxy for
affordability. The commenter recommended that the chosen methodology be
based on use of actual data. Neither commenter offered a recommended
substitute for the proposed methodology and these standard measures of
affordability.
Fannie Mae suggested instead using the affordability estimation
methodology for the Enterprises' housing goals in Sec. 1282.15(e),
which is available when rental data is missing,\52\ but did not
elaborate on its reasons for recommending that methodology. Fannie Mae
stated that it would need to incur additional expenditures to
operationalize the proposed census tract methodology.
---------------------------------------------------------------------------

\52\ See 12 CFR 1282.15(e).
---------------------------------------------------------------------------

Freddie Mac did not address the reasonableness of the proposed
methodology directly, but stated that its support for affordable
manufactured housing communities is confirmed by various measures,
including the proposed methodology.
An organization that specializes in supporting resident-owned
manufactured housing communities commented that in its many years of
training and financing resident-owned communities in numerous states,
it has not seen any manufactured housing communities in which fewer
than 50 percent of homeowners earn less than 80 percent of area median
income. The commenter stated that 86 percent of homeowners in its
current manufactured housing community portfolio earn less than 80
percent of area median income. The commenter recommended, therefore,
that the final rule treat all manufactured housing communities as
serving low- and moderate-income households.
FHFA understands the view that manufactured housing communities
overwhelmingly serve lower-income households. However, not all
manufactured housing communities can be deemed to meet the Duty to
Serve income requirements, as some communities are not affordable to
households at the Duty to Serve income levels.\53\
---------------------------------------------------------------------------

\53\ See, e.g., Tom Delavan, ``America's Most Glamorous Trailer
Park,'' The New York Times Style Magazine (Nov. 11, 2015), available
at http://www.nytimes.com/2015/11/11/t-magazine/paradise-cove-malibu-million-dollar-trailer-parks.html?_r=1; Deborah Jellett,
``Ten of the Best Luxury Trailer Parks in the World,'' The Richest
(Web site) (Apr. 28, 2014), available at http://www.therichest.com/luxury/celebrity-home/ten-of-the-best-luxury-trailer-parks-in-the-world/.
---------------------------------------------------------------------------

FHFA also appreciates the suggestion that the proxy methodology be
tailored more to the individual financial circumstances of the
community's residents. However, community owners and loan sellers would
not be expected to know or share the personal financial circumstances
of each resident, making tailored matrices challenging to develop.
In response to the suggestion that the Sec. 1282.15(e) estimation
methodology for the housing goals \54\ be used for manufactured housing
communities under the Duty to Serve, FHFA notes that the housing goals
methodology was developed for other types of multifamily rental
housing. Accordingly, FHFA has determined that the methodology
established in the rule is more appropriate to that task.
---------------------------------------------------------------------------

\54\ See generally 12 CFR 1282.15(e).
---------------------------------------------------------------------------

FHFA also recognizes that under the census tract methodology, the
Enterprises could receive Duty to Serve credit for purchases of blanket
loans on manufactured housing communities that may include some
residents with incomes exceeding the area median income. The
methodology takes this into account through its partial credit
calculation for manufactured housing communities in higher income
census tracts. FHFA has determined that the census tract methodology is
a reasonable approach that will result in Duty to Serve credit being
provided for manufactured housing communities that largely serve
income-eligible households. In addition, mixed-income communities may
contribute significant benefits to the lower-income households in the
community and to the success and sustainability of the community.
The final rule also provides that FHFA may approve the use of
another methodology for determining the affordability of homes in a
manufactured housing community is appropriate. If an Enterprise
believes that an alternative methodology would be feasible and
preferable to the methodologies in the final rule for a particular type
of manufactured housing community transaction, the Enterprise should
raise the matter with FHFA for consideration.
2. Affordable Housing Preservation Market--Sec. 1282.34
The below section describes the final rule provisions for the
affordable housing preservation market. The section discusses the scope
of eligible preservation activities for Duty to Serve credit as
including both affordable rental housing preservation and affordable
homeownership preservation. It also identifies the circumstances under
which eligible Duty to Serve activities may involve permanent
construction take-out loans. The section further identifies the
Statutory Activities enumerated for housing projects under the Safety
and Soundness Act.\55\ It also discusses the seven Regulatory
Activities identified by FHFA, which are: (1) Financing of small
multifamily rental properties; (2) energy or water efficiency
improvements on multifamily rental properties; (3) energy or water
efficiency improvements on single-family, first lien properties; (4)
shared equity programs for affordable homeownership preservation; (5)
HUD Choice Neighborhoods Initiative; (6) HUD Rental Assistance
Demonstration program; and (7) purchase and rehabilitation of certain
distressed properties. Finally, the section sets out requirements for
Additional Activities that the Enterprises may propose in the
affordable housing preservation market for Duty to Serve credit.
---------------------------------------------------------------------------

\55\ 12 U.S.C. 4565(a)(1)(B).
---------------------------------------------------------------------------

a. Eligible ``Preservation'' Activities--Sec. Sec. 1282.34(b);
1282.37(b)(6), (c)
Consistent with the proposed rule, Sec. 1282.34(b) of the final
rule provides that Enterprise activities eligible to be included in a
Plan under the affordable housing preservation market are activities
that facilitate a secondary market for mortgages on residential
properties for very low-, low-, or moderate-income families consisting
of affordable rental housing preservation and affordable homeownership
preservation.
Under the final rule, only certain permanent construction take-out
loans are eligible for Duty to Serve credit under the affordable
housing preservation market.\56\ Section 1282.37(c)(1) of the final
rule establishes two categories of these loans that are eligible for
Duty to Serve credit. The first category is Enterprise activities
related to permanent construction take-out loans for replacement
properties that preserve existing subsidies on affordable housing for a
regulatory period of required affordability. This period must be at
least as restrictive as the longest affordability restriction
applicable to the subsidy or subsidies being preserved. The second
category is Enterprise activities related to permanent construction
take-out loans

[[Page 96260]]

for housing that was developed under state or local inclusionary
zoning, real estate tax abatement, or loan programs, where the property
owner has agreed to restrict a portion of the units for occupancy by
very low-, low-, or moderate-income families, and to restrict the rents
that can be charged for those units at affordable rents to those
populations, or where the property is developed for a shared equity
program that meets the requirements to be eligible for Duty to Serve
credit as discussed below and in Sec. 1282.34(d)(4). For these loans
to be eligible for Duty to Serve credit, there must be a regulatory
agreement, recorded use restriction, or deed restriction in place that
maintains affordability for the term defined by the state or local
program. These limitations on eligible activities related to permanent
construction take-out loans apply to Statutory, Regulatory, and
Additional Activities in this market, which are described in detail
below.
---------------------------------------------------------------------------

\56\ A permanent construction take-out loan is a long-term
mortgage that replaces a short-term construction loan for a new
property. The Enterprises currently purchase permanent construction
take-out loans but not acquisition/development/construction loans.
---------------------------------------------------------------------------

Permanent construction take-out loans that do not meet the
requirements of either of these two categories are not included in the
final rule's interpretation of ``preservation'' under the affordable
housing preservation market. However, such permanent construction take-
out loans are eligible for Duty to Serve credit under the manufactured
housing and rural markets subject to meeting the eligibility
requirements for those markets as provided in the final rule.
Additional guidance on preservation activities and affordability
periods may be provided in FHFA's Evaluation Guidance as necessary.
A further discussion of the final rule's provisions on permanent
construction take-out loans is below.
b. Permanent Construction Take-Out Loans
As discussed in the SUPPLEMENTARY INFORMATION to the proposed rule,
the Safety and Soundness Act enumerates nine statutory programs for
Duty to Serve credit under the affordable housing preservation market,
which are discussed below, but does not otherwise define the term
``preservation'' for this market.\57\ Preservation strategies for
affordable rental housing and homeownership differ. For affordable
rental housing, preservation in the affordable housing industry is
generally understood to mean preserving the affordability of rents to
tenants in existing properties.\58\ This includes preventing the
conversion of affordable properties to market rate rents at the end of
long-term affordability periods, which are typically 15 years, 20
years, or 30 years, at which time major rehabilitation of the
properties may be needed. This is consistent with the plain meaning of
the term ``preservation,'' which is maintaining something in its
existing state.\59\ The concept of ``preservation'' in the rental
housing context is not generally understood to include new construction
of rental properties.
---------------------------------------------------------------------------

\57\ 12 U.S.C. 4565(a)(1)(B).
\58\ This is the focus of HUD's Office of Affordable Housing
Preservation (recently renamed the Office of Recapitalization).
\59\ See Cambridge Dictionaries Online, definition of
``preserve.''
---------------------------------------------------------------------------

However, in the post-financial crisis years, the number of renters
has been expanding while the stock of affordable rental housing has
been shrinking. The rate of new construction of affordable rental
housing has not kept pace with the demand for such housing. Further,
more desirable markets face particular upward rent pressure. One way to
preserve affordability is to give Duty to Serve credit for permanent
construction take-out loans for rental properties where long-term
affordability periods are required by regulatory agreements, which for
several federal programs are set at 15 years, 20 years, or 30 years.
Some of the specifically enumerated programs under the affordable
housing preservation market in the Safety and Soundness Act involve new
construction, which could indicate congressional intent to include
support for new construction under this market. However, Congress may
have instead intended only that support for existing properties under
these programs at the point of their expiring regulatory agreements be
included in the affordable housing preservation market.
The proposed rule specifically requested comment on whether the
term ``preservation'' should be interpreted to allow Duty to Serve
credit to be provided to Enterprise purchases of permanent construction
take-out loans on new rental properties with long-term affordability
regulatory agreements that restrict incomes and rents, and whether 15
years or some other term would be an appropriate minimum period of
long-term affordability. The proposed rule also specifically requested
comment on whether the term ``preservation'' should be interpreted to
include Enterprise purchases of refinance mortgages on existing rental
properties with long-term affordability, and whether the preservation
activities should be required to extend the property's regulatory
agreement restricting household incomes and rents for some minimum
number of years, such as 10 years, beyond the date of the Enterprises'
loan purchases and, if so, what an appropriate minimum period of long-
term affordability would be for the extended use regulatory agreement.
FHFA received numerous comments regarding the interpretation of
``preservation.'' Commenters generally agreed that Enterprise support
for extending long-term affordability for existing rental properties
should be included as ``preservation.'' However, commenters differed on
whether and to what extent FHFA should include Enterprise support for
permanent construction take-out loans as ``preservation.'' Both
Enterprises recommended that FHFA include new construction as
``preservation'' in order to address the lack of supply of affordable
rental housing, which they stated cannot be met by preservation of
existing properties alone. Fannie Mae did not specify whether FHFA
should limit the types of new construction that should be eligible as
``preservation'' for Duty to Serve credit. Freddie Mac recommended that
new construction for properties with regulatory agreements requiring
long-term affordability be considered.
Support for Including New Construction for Replacement Properties That
Preserve Existing Subsidies
The majority of commenters who responded to FHFA's questions on the
interpretation of ``preservation'' and on whether FHFA should provide
credit for Enterprise support for certain permanent construction take-
out loans stated that they only supported new construction that
preserves existing subsidy under ``preservation'' for Duty to Serve
purposes. These commenters included an individual, several nonprofit
organizations, policy advocacy organizations, and governmental
entities. A nonprofit organization cited the complicated and labor
intensive nature of preserving existing properties as a reason for
limiting the definition of ``preservation'' and argued that the Safety
and Soundness Act's meaning of ``preservation'' was well understood as
preserving the deep affordability of federally-supported affordable
rental housing. The nonprofit organization, along with two policy
advocacy organizations, cited transfers of Section 8 subsidy contracts,
Rental Assistance Demonstration transactions, and projects that use
project-basing of tenant protection vouchers and project-based vouchers
as examples that would fit within this category of permanent
construction take-out loans. One of these policy advocacy organizations

[[Page 96261]]

commented that given the difficulty of preserving existing affordable
housing stock, the Enterprises would likely choose not to engage in
such activities if less difficult options were included as eligible
activities under the Duty to Serve. The commenter, along with a
nonprofit organization, stated that Enterprise support of new
construction with long-term affordability restrictions in high
opportunity areas is an important need, but should fall under the
Enterprises' housing goals.
A local government entity commented that Duty to Serve credit the
Enterprises receive for activities related to Choice Neighborhood
Initiative grants should include new construction for replacement
housing units, which could help the government entity with the final
stages of its project through the program. A nonprofit organization and
a coalition of practitioners working with the Rental Assistance
Demonstration program stated that much of the existing affordable
housing stock, especially public housing, is very old and beyond the
point of upgrades to modernize properties. The commenters noted that
new construction would allow these subsidized properties to be replaced
with properties that may be less dense, more energy efficient, and more
mixed-income. Several policy advocacy organizations and an individual
commented that new construction should only be considered
``preservation'' if Enterprise proposals on new construction encourage
residential economic diversity or provide financing for replacement
housing that preserves the subsidies on existing affordable units
specifically in areas of opportunity. These commenters noted that the
new multifamily construction market currently does not appear to need
additional liquidity.
Support for Including New Construction With Regulatory Periods of
Affordability
Some commenters supported treating new construction with regulatory
agreements to maintain affordability as ``preservation,'' though they
differed on how long the regulatory periods should be. Freddie Mac and
a nonprofit organization recommended that FHFA include as
``preservation'' new construction with regulatory agreements requiring
long-term affordability. A nonprofit organization, a policy advocacy
organization, and a trade association supported including permanent
construction take-out loans on rental properties with long-term
affordability regulatory agreements as ``preservation.'' The policy
advocacy organization recommended a minimum affordability period of 15
years, and added that permanent construction take-out loans with longer
regulatory periods should be scored higher in FHFA's evaluation process
for the Enterprises' Duty to Serve performance. A state housing finance
agency suggested a 30-year regulatory affordability period for new
construction, noting that the standard for regulatory agreements is
considerably higher than 15 years. Another state government entity
recommended new construction developments with perpetual affordability
restrictions as the only kind of new construction that should be
treated as ``preservation,'' stating that the preservation of existing
housing stock should be the focus of the Duty to Serve rule. A trade
association recommended that FHFA require 50-year or ``life of the
building'' regulatory affordability periods. The commenter stated that
it is inefficient to reinvest public and private funds after a 15-year
regulatory term expires in order to recapitalize a property and retain
its affordability.
Support for New Construction Under Other Parameters
Several commenters supported some types of new construction under
``preservation'' for the Duty to Serve subject to certain parameters
other than regulatory agreements requiring long-term affordability
periods or replacement housing that preserves existing subsidies.
A nonprofit organization, along with one of its nonprofit
affiliates, recommended that new construction, if included, be treated
as ``preservation'' only if it is limited to places of targeted need,
such as high-needs rural regions. The commenters expressed concern that
if new construction without such limitations is included as
``preservation,'' it could distract from the challenging task of
preserving existing affordable properties and stray from the statutory
intent of the Duty to Serve.
A trade association commented that new construction should be
counted under the Duty to Serve with the preservation of affordability
assumed through the underwriting of the property, factors in the
market, and amenities in the property and its units, rather than
through a requirement for long-term regulatory agreements, which the
commenter stated could add barriers and compliance burdens.
A policy advocacy organization recommended that Enterprise support
of permanent financing for new construction that adds affordable
housing in neighborhoods that need more affordable housing should be
eligible for Duty to Serve credit. The commenter further suggested that
FHFA provide the bulk of the Duty to Serve credit to traditional
preservation of existing properties, stating that there is a core
mission to preserve existing and largely irreplaceable subsidized
housing.
Support for Treating ``Preservation'' Only as Preserving Existing
Properties
A number of commenters recommended that ``preservation'' be
interpreted specifically as preserving existing rental properties. Two
individuals, two policy advocacy organizations, and a nonprofit
organization commented that ``preservation'' should include purchasing
or refinancing loans on existing rental properties where units are
being converted from market rate to affordable. A nonprofit
organization noted as reasons for limiting the interpretation of
``preservation'' that new construction of affordable housing falls
under the Enterprises' housing goals and that existing federally
supported rental housing properties are often the most affordable
properties available in communities. Two state government entities
commented that the Enterprises already purchase permanent, multifamily
construction take-out loans and, therefore, do not need Duty to Serve
credit to encourage such activities. A number of policy advocacy
organizations expressed concern that unless new construction that
replaces existing affordable housing being demolished is built in
gentrifying or high opportunity areas, it could exacerbate segregation.
These policy advocacy organizations cited this concern as a reason for
opposing new construction being part of FHFA's interpretation of
``preservation.''
After considering the comments, as discussed above, FHFA has
determined in Sec. 1282.37(b)(6) of the final rule that Enterprise
activities related to permanent construction take-out loans should be
treated as eligible ``preservation'' activities under the affordable
housing preservation market only if such loans meet the requirements of
either of two categories. The first category is permanent construction
take-out loans for replacement properties that preserve existing
subsidies on affordable housing. The permanent construction take-out
loan must preserve existing subsidy with a regulatory period of
required affordability that is at least as restrictive as the longest
affordability restriction applicable to the subsidy or subsidies being
preserved.

[[Page 96262]]

The second category is permanent construction take-out loans for
housing that was developed under state or local inclusionary zoning,
real estate tax abatement, or loan programs, where the property owner
has agreed to restrict a portion of the units for occupancy by very
low-, low-, or moderate-income families, and to restrict the rents that
can be charged for those units at affordable rents to those
populations, or where the property is developed for a shared equity
program that meets the requirements to be eligible for Duty to Serve
credit as discussed below and in Sec. 1282.34(d)(4). There must be a
regulatory agreement, recorded use restriction, or deed restriction in
place that maintains affordability for the term defined by the state or
local program.
Including these limited types of permanent construction take-out
loans as eligible for Duty to Serve credit could encourage the
Enterprises to make a needed impact in the affordable housing
preservation market, which would benefit lower-income households. These
requirements will tie permanent construction take-out loans under the
affordable housing preservation market more closely to preserving the
subsidy on existing housing, which is difficult and complex to
preserve, and to preserving long-term affordability of affordable
housing developed through state or local inclusionary zoning, real
estate tax abatement, or loan programs.
The final rule does not make the above requirements for permanent
construction take-out loans under the affordable housing preservation
market applicable to permanent construction take-out loans under the
manufactured housing and rural markets. This is because the Safety and
Soundness Act does not require ``preservation'' as a component of the
activities serving those markets. In addition, the manufactured housing
and rural markets may have unique needs for new construction of
affordable housing without being tied to replacement of existing
housing that preserves subsidy, or to housing developed under state or
local inclusionary zoning, real estate tax abatement, or loan programs,
where a regulatory agreement, recorded use restriction, or deed
restriction maintains affordability of a portion of the property's
units for the term defined by the state or local program. For example,
rural areas have a specific need for small multifamily properties,
given the lower population densities in rural communities. Developers
considering financing affordable multifamily housing in rural areas may
face challenges with transaction and operational costs, which can be
spread more cost-effectively across larger multifamily properties, and
they may be reluctant to finance affordable rural multifamily housing
if they believe revenues will not cover costs.
c. Statutory Activities--Sec. 1282.34(c)
The Safety and Soundness Act provides that the Enterprises ``shall
develop loan products and flexible underwriting guidelines to
facilitate a secondary market to preserve housing affordable to very
low-, low-, and moderate-income families, including housing subsidized
under the following government programs:

The project-based and tenant-based rental assistance
programs under Section 8 of the United States Housing Act of 1937 (42
U.S.C. 1437f);
The program under Section 236 of the National Housing Act
(rental and cooperative housing for lower-income families) (12 U.S.C.
1715z-1);
The program under Section 221(d)(4) of the National
Housing Act (housing for moderate-income and displaced families) (12
U.S.C. 1715l);
The supportive housing for the elderly program under
Section 202 of the Housing Act of 1959 (12 U.S.C. 1701q);
The supportive housing program for persons with
disabilities under Section 811 of the Cranston-Gonzalez National
Affordable Housing Act (42 U.S.C. 8013);
The programs under title IV of the McKinney-Vento Homeless
Assistance Act (42 U.S.C. 11361 et seq.), but only permanent supportive
housing projects subsidized under such programs;
The rural rental housing program under Section 515 of the
Housing Act of 1949 (42 U.S.C. 1485);
The low-income housing tax credit (LIHTC) under Section 42
of the Internal Revenue Code of 1986 (26 U.S.C. 42); and
Comparable state and local affordable housing programs.''
\60\
---------------------------------------------------------------------------

\60\ 12 U.S.C. 4565(a)(1)(B).

Under Sec. 1282.34(c) of the final rule, Enterprise activities
related to facilitating a secondary market for mortgages on housing
under these statutorily enumerated programs are eligible for Duty to
Serve credit. Enterprise activities under these statutory programs are
referred to as ``Statutory Activities'' in the final rule. Under Sec.
1282.32(d) of the final rule, FHFA will designate a minimum number of
Statutory Activities and Regulatory Activities in the Evaluation
Guidance that the Enterprises must consider whether to undertake. The
HUD Section 811 program and McKinney-Vento Homeless Assistance
programs, do not, at this time, lend themselves to Enterprise support,
so FHFA does not expect the Enterprises to address these two programs
in their Plans for the reasons discussed below. For each Statutory
Activity that is addressed in their Plans under this requirement in
Sec. 1282.32(d), the Enterprises must describe how they choose to
undertake the activity and related objectives, or the reasons why they
will not undertake the activity.
The status of each statutory program, the relevant comments
received, and the role that the Enterprises could play in assisting
each statutory program, are discussed below. There were relatively few
comments on Enterprise support for the statutory programs.
(i) HUD Section 8 Rental Assistance Program
Under HUD's Section 8 rental assistance program, property owners
receive rent payment subsidies from HUD covering the difference between
the market rent for a unit and the tenant's rent contribution. The
proposed rule specifically requested comment on ways, including
potential changes to their underwriting and reserve requirements, the
Enterprises could extend their support for Section 8-assisted
properties consistent with safety and soundness.
Two nonprofit intermediaries and a trade association requested that
the Enterprises evaluate their underwriting practices on loans for
properties supported by Section 8 subsidies and, in particular,
reconsider how they underwrite their reserve requirements. The
commenters stated that the Enterprises' reserve requirements, by taking
into account the risk that Congress will not appropriate funds for the
Section 8 program, make refinancing more difficult or infeasible, or
result in smaller loan amounts with less money available for property
rehabilitation. One of the nonprofit intermediaries emphasized that
Congress has repeatedly renewed funding for Section 8 rental assistance
and, thus, the risk of Congress not appropriating Section 8 funding is
quite low. Several commenters also recommended that the Enterprises
reconsider their underwriting requirements for minimum vacancies in
light of the very low historical vacancy rates for the Section 8
program.
The final rule does not dictate specific underwriting requirements
for Enterprise engagement with the Section 8 rental assistance program.
FHFA encourages the Enterprises to consider,

[[Page 96263]]

in contemplating whether to make any loan product changes to support
the Section 8 rental assistance program, whether the commenters'
suggestions on underwriting should be included.\61\
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\61\ Commenters in a number of circumstances addressed
individual underwriting recommendations. As noted throughout, FHFA
encourages the Enterprises to consider this feedback, although FHFA
also notes that this should not be construed as an endorsement by
FHFA of those comments and FHFA will review any underwriting
guidelines as part of its review of Enterprise Plans for Non-
Objection.
---------------------------------------------------------------------------

(ii) HUD Section 236 Interest Rate Subsidy Program
Under HUD's Section 236 interest rate subsidy program, HUD
subsidizes the interest rate down to one percent on mortgages on
multifamily properties, in exchange for restrictions that keep rents at
affordable levels for the term of the mortgage, but no fewer than 20
years. The proposed rule specifically requested comment on ways the
Enterprises could extend their support for the Section 236 program.
A nonprofit intermediary requested that the Enterprises evaluate
their underwriting standards to recognize the importance of rent
restrictions and tenant protection requirements. Additionally, the
commenter requested that the Enterprises establish loan purchase
guidelines that recognize the importance of rent increase phase-in
periods as a way to both protect tenants and maximize the loan proceeds
available to recapitalize and preserve the property.
The final rule does not dictate specific underwriting requirements
for Enterprise engagement with the Section 236 program. FHFA encourages
the Enterprises to consider, in contemplating whether to make any loan
product changes to support the Section 236 program, whether the
commenters' suggestions on underwriting should be included.
Where an Enterprise is considering whether to include the Section
236 program in its Plan, FHFA encourages the Enterprise to consider
loan product changes allowing tenant protection vouchers to preserve
the affordability of the Section 236 properties. Tenants in Section 236
properties may be statutorily eligible for Enhanced Vouchers, a type of
Tenant Protection Voucher which can be project-based and helps preserve
long-term affordability.\62\ In addition, FHFA encourages the
Enterprises to consider whether a Section 236 property has a Rent
Supplement or Rental Assistance Program contract and is, therefore,
eligible for conversion under the Rental Assistance Demonstration
program (see Sec. 1282.34(d)(6) of the final rule). Finally, the
Enterprises are encouraged to consider refinancing Section 236
properties that are still receiving interest rate reduction payments
and are still subject to the original Section 236 Use Restrictions.
---------------------------------------------------------------------------

\62\ https://www.hudexchange.info/course-content/hud-multifamily-affordable-housing-preservation-clinics/Preservation-Clinic-Tenant-Protection-Vouchers.pdf.
---------------------------------------------------------------------------

(iii) HUD Section 221(d)(4) FHA Insurance Program
HUD's Federal Housing Administration (FHA) insurance program under
Section 221(d)(4) provides financing for the new construction or
substantial rehabilitation of multifamily properties, and for permanent
financing when construction is completed. The proposed rule
specifically requested comment on ways the Enterprises could support
properties currently funded under the Section 221(d)(4) program. A
nonprofit intermediary requested that the Enterprises provide
underwriting clarity and flexibility in the treatment of subordinate
debt, which the commenter noted is often a feature in refinancing
Section 221(d)(4) loans.
The final rule does not dictate specific underwriting requirements
for Enterprise purchases of Section 221(d)(4) loans. FHFA encourages
the Enterprises to consider, in contemplating whether to make any loan
product changes to support the Section 221(d)(4) program, whether the
commenter's suggestion should be included.
(iv) HUD Section 202 Housing Program for Elderly Households
HUD's Section 202 program for low-income elderly households is a
direct loan and capital advance program under which HUD provides
construction or rehabilitation funds and rental subsidies. The proposed
rule specifically requested comment on ways the Enterprises could
support properties currently funded under the Section 202 program.
A nonprofit intermediary requested that the Enterprises provide
underwriting guidance that is consistent with FHA's treatment of
Section 202 loans. Specifically, the commenter requested that the
Enterprises develop standards that, like FHA's standards, permit
Section 202 refinance loans to be underwritten to the above-market
rents that reflect the presence of a long-term Section 8 contract.
Additionally, the commenter requested that the Enterprises adopt
underwriting standards that, like FHA's standards, adequately account
for property tax abatements and exemptions when purchasing a Section
202 loan.
The final rule does not dictate specific underwriting requirements
for Enterprise engagement with the Section 202 program. FHFA encourages
the Enterprises to consider, in contemplating whether to make any loan
product changes to support the Section 202 program, whether the
commenter's suggestions should be included.
As described by a nonprofit intermediary, where an Enterprise is
considering whether to include the Section 202 program in its Plan,
FHFA encourages the Enterprise to consider loan product changes
allowing current HUD policies on the prepayment and refinancing of
Section 202 Direct Loans.\63\ Further, the Enterprises are encouraged
to consider the potential eligibility of Section 202 Direct Loan
tenants to receive an Enhanced Voucher which, as discussed above, is a
type of Tenant Protection Voucher that can be converted to project-
based vouchers and preserve long-term eligibility upon mortgage
maturity.\64\ In addition, the Enterprises are encouraged to consider
underwriting the operating costs of providing service coordinators, who
are responsible for assuring that elderly residents are linked to the
supportive services they need to continue living independently in
Section 202 properties.\65\
---------------------------------------------------------------------------

\63\ http://portal.hud.gov/hudportal/documents/huddoc?id=PIH2015-07.pdf.
\64\ Id. at 6.
\65\ http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/scp/scphome.
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(v) HUD Section 811 Housing Program for Disabled Households
HUD's Section 811 program is a capital advance and rental
assistance program for low-income disabled persons, which carries no
debt. As discussed in the proposed rule, because of the absence of
debt, there is no obvious role for the Enterprises to support projects
funded under this program, and FHFA is not aware that the Enterprises
have ever supported mortgage financing under this program.
The proposed rule specifically requested comment on ways the
Enterprises could support the Section 811 program. Several commenters
mentioned this question in their comments, but did not provide specific
suggestions for an appropriate role for the Enterprises to support
projects funded under this program. FHFA does not expect the
Enterprises to be able to address this program in their Plans.

[[Page 96264]]

(vi) McKinney-Vento Homeless Assistance Act Programs
McKinney-Vento Homeless Assistance Act programs provide supportive
housing grants to help homeless persons, especially homeless families
with children, transition to independent living. Because projects under
these programs typically do not involve debt financing, there is no
obvious role for the Enterprises to support projects funded under these
programs, and FHFA is not aware that the Enterprises have ever
supported mortgage financing under these programs.
The proposed rule specifically requested comment on ways the
Enterprises could support McKinney-Vento Homeless Assistance Act
programs. State housing finance agencies and their trade organization
mentioned this question in their comments, but did not provide specific
suggestions for an appropriate role for the Enterprises to support
projects funded under these programs. FHFA does not expect the
Enterprises to be able to address these programs in their Plans.
(vii) USDA Section 515 Rural Housing Program
Under the USDA Section 515 program, USDA provides direct loans and
rental assistance to develop rental housing for low-income households
in rural locations. The proposed rule specifically requested comment on
ways the Enterprises could extend their support for the Section 515
program.
Multiple nonprofit organizations, policy advocacy groups, state
government entities, and trade associations urged greater Enterprise
participation in supporting financing for rehabilitating Section 515
multifamily properties. A state government entity requested that the
Enterprises support financing rehabilitation of Section 515 properties
that remain subject to the Section 515 use restrictions. A policy
advocacy organization requested that the Enterprises consider allowing
small Section 515 properties to be bundled and financed together,
making use of economies of scale, in order to help preserve the
properties' affordability. Several nonprofit intermediaries and a state
government entity requested that the Enterprises consider purchasing
loans where an existing Section 515 mortgage is being re-amortized in
order to maintain the financing when the Section 515 mortgage is
subordinated to the new debt.
The final rule does not dictate specific underwriting requirements
for Enterprise engagement with the Section 515 program. FHFA encourages
the Enterprises to consider, in contemplating whether to make any loan
product changes to support the Section 515 program, whether the
commenters' suggestions should be included.
(viii) Federal Low-Income Housing Tax Credits (LIHTCs)
Under the LIHTC program, investors provide developers with funds to
develop affordable rental housing properties by purchasing the
developers' tax credits (LIHTC equity). LIHTC projects also often have
loans (debt) that are eligible for purchase by the Enterprises, like
any other multifamily property. LIHTC properties have long-term
regulatory use agreements requiring the housing to remain affordable
for very low- or low-income households for the specified long-term
retention period.
FHFA interprets the Duty to Serve statutory provision for the
LIHTCs to apply to debt, as it requires the Enterprises to ``develop
loan products and flexible underwriting guidelines to facilitate a
secondary market'' to preserve LIHTC-subsidized properties.\66\
Accordingly, Duty to Serve credit under this Statutory Activity is
limited to Enterprise support for debt on LIHTC-subsidized properties.
The Enterprises offer specialized loan purchase programs to refinance
and rehabilitate existing LIHTC properties in conjunction with
extending their regulatory use agreements, and are an important source
of financing for preservation of older LIHTC projects. Commenters had
no specific suggestions on new approaches the Enterprises could take to
further support debt on projects that have received LIHTC equity
investment.
---------------------------------------------------------------------------

\66\ See 12 U.S.C. 4565(a)(1)(B)(viii).
---------------------------------------------------------------------------

Pursuant to a different Duty to Serve statutory provision on
investments and grants \67\ and under Sec. 1282.37(b)(5), LIHTC equity
investments by the Enterprises in rural areas are eligible for Duty to
Serve credit under certain circumstances. This is discussed further
below in the rural markets section.
---------------------------------------------------------------------------

\67\ See 12 U.S.C. 4565(d)(2)(D).
---------------------------------------------------------------------------

(ix) Comparable State and Local Affordable Housing Programs
In addition to the specifically-enumerated programs in the Safety
and Soundness Act discussed above, the Act provides that the
Enterprises shall facilitate a secondary market for ``comparable state
and local affordable housing programs.'' \68\ Consistent with the
proposed rule, the final rule provides that an Enterprise may include
such programs in its Plan subject to FHFA determination of whether the
programs are eligible for Duty to Serve credit. The proposed rule
specifically requested comment on whether there are other state or
local affordable housing programs for multifamily or single-family
housing the Enterprises could support that should be eligible to
receive Duty to Serve credit.
---------------------------------------------------------------------------

\68\ See 12 U.S.C. 4565(a)(1)(B)(ix).
---------------------------------------------------------------------------

A state government entity and a trade association requested that
the Enterprises provide a secondary market for seasoned loans made by
state housing trust funds, state housing finance agencies, and other
state and local lending programs. The trade association and several
civil rights organizations commented that the Enterprises could do more
to assist state and local programs that support neighborhood
revitalization activities. A nonprofit intermediary and a policy
advocacy organization expressed concern that some state and local
programs provide very little subsidy, and requested that FHFA set up a
review process for determining which programs should qualify under this
Statutory Activity. The nonprofit intermediary also requested that FHFA
limit Duty to Serve credit to only the portion of a mixed-income
multifamily rental property that is deemed affordable to income-
eligible households.
Based upon a review of the comments, FHFA encourages the
Enterprises to consider including in their Plans state or local
programs that provide subsidized housing to very low-, low-, and
moderate-income families. If an Enterprise chooses to include a state
or local affordable housing program in its Plan, the Enterprise must
provide a sufficient explanation of how the program is comparable to
one of the other statutory programs in Sec. 1282.34(c) discussed above
in the way it provides subsidy and preserves affordable housing for the
income-eligible households. If FHFA determines that the program is not
comparable, FHFA will object to including it under this Statutory
Activity.
As discussed in the proposed rule, examples of comparable state and
local programs for single-family affordable housing that could receive
Duty to Serve credit under this Statutory Activity include local
neighborhood stabilization programs that enable communities to address
problems related to mortgage

[[Page 96265]]

foreclosure and abandonment through the purchase and redevelopment of
foreclosed or abandoned homes for very low-, low-, or moderate-income
households. Examples of comparable state and local programs for
multifamily affordable housing that could receive Duty to Serve credit
include support for state low-income housing tax credit programs,
programs for redevelopment of government-owned land or buildings as
affordable multifamily housing, and inclusionary zoning requirements
for multifamily housing.\69\
---------------------------------------------------------------------------

\69\ Inclusionary zoning refers to local government planning
ordinances that require a specified portion of the units in newly
constructed housing to be reserved for and affordable to very low-
to moderate-income households.
---------------------------------------------------------------------------

For purposes of considering and addressing comparable state and
local programs in their Plans, the Enterprises clearly cannot be
expected to consider the many state and local affordable housing
programs operating throughout the country. However, FHFA encourages the
Enterprises to make a reasonable effort to consider a cross-section of
programs across the country.
Other Federal Affordable Housing Programs
The proposed rule specifically requested comment on whether there
are other federal affordable housing programs that the Enterprises
could support that should receive Duty to Serve credit. Commenters
including nonprofit intermediaries, trade associations, policy advocacy
organizations, and state government entities provided suggestions about
many additional federal programs. The most common federal affordable
housing program identified by multiple nonprofit intermediaries, trade
associations, and policy advocacy organizations was the USDA Section
538 program. A trade association and a policy advocacy organization
identified the USDA Section 514 and 516 programs, and a nonprofit
intermediary identified the Section 184 Indian Housing Loan Guarantee
Program.
In the rural markets discussion under Sec. 1282.35(c) below, FHFA
has specifically identified these programs as examples of programs
eligible for Duty to Serve credit under the rural Regulatory Activities
where the loans are made to very low-, low-, or moderate-income
families as defined under the Duty to Serve.
Several nonprofit organizations and policy advocacy organizations
identified the National Housing Trust Fund and Capital Magnet Fund as
federal affordable housing programs that should be eligible for Duty to
Serve credit. As stated in the Safety and Soundness Act and in Sec.
1282.37(b)(1) of the final rule, and as discussed in the SUPPLEMENTARY
INFORMATION to the proposed rule, Enterprise grant contributions to the
National Housing Trust Fund and the Capital Magnet Fund, as well as
Enterprise mortgage purchases funded with such grant amounts, are not
eligible activities to receive Duty to Serve credit.\70\ The feedback
from commenters raised several points of clarification about when FHFA
may award Duty to Serve credit for Enterprise mortgage purchases when
the underlying property has received Housing Trust Fund or Capital
Magnet Fund funding.
---------------------------------------------------------------------------

\70\ See 12 U.S.C. 4565(d)(4).
---------------------------------------------------------------------------

FHFA may provide Duty to Serve credit for an eligible activity
under this final rule--such as supporting the Regulatory Activity of
small multifamily housing--where the property underlying an Enterprise
mortgage purchase happens to have received Housing Trust Fund or
Capital Magnet Fund funding through a source other than the Enterprise.
The Safety and Soundness Act states that FHFA may award Duty to Serve
credit ``only to the extent that such purchases by the enterprises are
funded other than with such grant amounts [Housing Trust Fund and
Capital Magnet Fund].'' This language prohibits FHFA from providing any
Duty to Serve credit if an Enterprise were to use Housing Trust Fund or
Capital Magnet Fund grant amounts to fund the Enterprise's mortgage
purchase. However, while the Enterprises provide assessments toward the
Housing Trust Fund and Capital Magnet Fund, there are no instances
where the Enterprises use these grant amounts to fund their own
mortgage purchases.
d. Regulatory Activities--Sec. 1282.34(d)
Consistent with the proposed rule, Sec. 1282.34(d)(1)-(6) of the
final rule identifies six specific affordable housing preservation
activities as Regulatory Activities. In addition, Sec. 1282.34(d)(7)
of the final rule includes a new affordable housing preservation
Regulatory Activity for Enterprise support for lending programs for
purchase or rehabilitation of certain distressed properties. The seven
Regulatory Activities are discussed below.
(i) Small Multifamily Rental Properties--Sec. 1282.34(d)(1)
Section 1282.34(d)(1) of the final rule establishes a Regulatory
Activity for Enterprise support for financing small multifamily rental
housing, where the financing is provided by community development
financial institutions (CDFIs), insured depository institutions, or
federally insured credit unions, each of whose total assets do not
exceed $10 billion. This is a change from the proposed Regulatory
Activity, which would have required Enterprise purchase and
securitization of loan pools backed by existing small multifamily
rental properties from CDFIs, community financial institutions, or
federally insured credit unions, each of whose total assets are within
an inflation-adjusted asset cap of $1.123 billion ($1.128 billion with
2016 inflation adjustment),\71\ where the loan pools are backed by
existing small multifamily rental properties. Consistent with the
proposed rule, Sec. 1282.1 of the final rule defines ``small
multifamily property'' to mean a property with 5 to 50 rental units.
The purpose of this Regulatory Activity is to increase the volume of
small multifamily lending, and to increase the number of smaller
lenders that the Enterprises work with on small multifamily lending.
---------------------------------------------------------------------------

\71\ See 81 FR 9196 (Feb. 24, 2016) (FHFA Notice of annual
inflation adjustment for community financial institutions).
---------------------------------------------------------------------------

The proposed rule specifically requested comment on whether
Enterprise purchase and securitization of loan pools backed by existing
small multifamily properties from small lenders should be a Regulatory
Activity. A number of commenters, including affordable housing
nonprofit organizations and trade organizations of lenders, generally
supported a Regulatory Activity to encourage small multifamily property
lending because small multifamily buildings are an important source of
affordable housing that is often unsubsidized. Both Enterprises
commented that support for small multifamily property lending should be
an Additional Activity rather than a Regulatory Activity.
Asset Cap Level
The proposed rule also specifically requested comment on whether
the proposed definitions of ``community development financial
institution,'' ``community financial institution,'' and ``federally
insured credit union'' subject to the proposed $1.123 billion asset cap
sufficiently capture smaller banks and community-based lenders for Duty
to Serve purposes. A number of commenters generally supported the
proposed asset cap level.
A nonprofit real estate developer stated that CDFIs should not be
subject

[[Page 96266]]

to any asset cap but did not provide a reason.
Freddie Mac and an unaffiliated individual commenter opposed the
proposed asset cap level. The individual stated that the predominant
lenders for small multifamily properties are commercial banks and
thrifts with assets of $2 billion to $10 billion, that the proposed
asset cap level would be impractically small and cost-inefficient, and
that it would not significantly increase the Enterprises' purchases of
loans on small multifamily properties. Freddie Mac expressed a similar
concern, noting that there are over 5,000 banks that would fall within
the proposed cap, but that only 19 of those banks have more than $100
million each in multifamily assets, which Freddie Mac identified as the
amount of multifamily assets necessary to support sustainable pooling
or securitization models. Freddie Mac recommended instead that the
final rule use the asset cap level in the Federal Reserve Board's (FRB)
definition of ``community banking organization,'' which includes
financial institutions with $10 billion or less in total consolidated
assets.\72\
---------------------------------------------------------------------------

\72\ See Board of Governors of the Federal Reserve System,
Supervisory and Regulation Letter, SR 13-14 (July 8, 2013),
available at https://www.federalreserve.gov/bankinforeg/srletters/sr1314.pdf.
---------------------------------------------------------------------------

FHFA finds compelling the comments that the proposed $1.123 billion
asset cap should be increased. Because the goal of this Regulatory
Activity is to encourage financing for small multifamily properties, if
the asset cap is so low that the entities actually originating loans on
small multifamily properties would not be able to qualify, then any
impact on the small multifamily market would be de minimis.
In analyzing what an appropriate asset cap level should be for
financial institutions in this Regulatory Activity, FHFA considered the
definitions of small financial institutions/community banks from the
CRA ($304 million), CFPB ($2 billion), FRB ($10 billion), and OCC ($1
billion). Because the feedback about the proposed asset cap level was
that it was too low, both the CRA and OCC definitions would also be
problematic as $304 million and $1 billion, respectively, are even
lower than the proposed $1.123 billion cap. In considering the FHFA,
CFPB, and FRB definitions, FHFA analyzed bank call report data to see
how many banks would be eligible under each definition. FHFA's analysis
validated Freddie Mac's comment that FHFA's proposed $1.123 billion
asset cap is likely not high enough to support substantially increasing
the volume of small multifamily loan purchases.
The CFPB definition raises the same issue. The CFPB definition of
``small creditor''--an institution with less than $2 billion in
assets--would add approximately 241 eligible banks and an additional
$12 billion in potential multifamily assets. Of these 241 additional
banks, only 25 have at least $100 million each in multifamily assets.
In contrast, if the asset cap in the FRB definition of ``community
banking organization''--an institution with $10 billion or less in
total consolidated assets--were used, approximately 6,000 banks would
be eligible, and these banks have a combined $108 billion in
multifamily assets. Of these 6,000 banks, approximately 174 have at
least $100 million each in multifamily assets.
For these reasons, FHFA is adopting an asset cap of $10 billion in
the final rule. The final rule also replaces the reference to
``community financial institutions'' in the proposed rule with the
broader term ``insured depository institutions'' and includes a
definition of the latter in Sec. 1282.1.
FHFA recognizes that this increase in the asset cap for smaller
multifamily lenders may create an incentive for the Enterprises to
increase their activities with lenders whose assets are closer to the
asset cap. To ensure that there are incentives for the Enterprises to
increase their activities with smaller lenders, including CDFIs, Sec.
1282.35(c)(3) of the final rule, discussed below, establishes a new
Regulatory Activity for Enterprise activities with financial
institutions with less than $304 million in assets in rural areas.
Purchase and Securitization of Loan Pools
The final rule does not include the requirement in the proposed
Regulatory Activity for purchase and securitization of loan pools
backed by existing small multifamily rental properties. FHFA recognizes
that purchase and securitization of loan pools is just one means to
accomplish Enterprise purchases of small multifamily mortgage loans.
The Enterprises have the expertise to determine the best method for
purchasing small multifamily mortgage loans. FHFA has determined that
it should not dictate to the Enterprises a particular loan purchase
channel, but rather has set the overall objective through the
Regulatory Activity, leaving the specific process to the discretion of
the Enterprises. This is consistent with the treatment of other
Regulatory Activities in the final rule, for which FHFA does not
dictate a particular loan purchase channel. Although FHFA expects that
the primary way the Enterprises will implement this Regulatory Activity
is through purchase and securitization of pools from lenders, FHFA
recognizes that there are multiple ways to support small multifamily
housing, and that the limitation in the proposed rule is not needed.
The higher asset cap will give the Enterprises the flexibility to
increase small multifamily lending in whatever way is most efficient
for them that broadens the market of small multifamily mortgage loan
sellers.
(ii) Energy or Water Efficiency Improvements on Multifamily
Properties--Sec. 1282.34(d)(2)
Section 1282.34(d)(2) of the final rule establishes a Regulatory
Activity for Enterprise support for financing of energy or water
efficiency improvements on multifamily rental properties, with several
modifications from the proposed rule discussed below. Under the revised
Regulatory Activity, Enterprise support for financing of energy or
water efficiency improvements is eligible for Duty to Serve credit
provided there are projections made based on credible and generally
accepted standards that (1) the improvements financed by the loan will
reduce energy or water consumption by the tenant or the property by at
least 15 percent, and (2) the utility savings generated over an
improvement's expected life will exceed the cost of installation.
Lowering energy and water use in multifamily rental buildings will
reduce the total amount that tenants spend for the energy and water
that they use, thus reducing their utility consumption. This can be
considered ``preservation'' under the affordable housing preservation
market because housing costs are typically defined as rent plus utility
costs. Thus, savings in utility consumption that reduce utility
expenses may help maintain the overall affordability of rental housing
for tenants.
The proposed rule specifically requested comment on whether
Enterprise support for multifamily properties that include energy
efficiency improvements resulting in a reduction in the tenant's energy
and water consumption and utility costs should be a Regulatory
Activity. A significant number of nonprofit organizations, trade
associations, government entities, and affordable housing advocacy
organizations supported making Enterprise support for financing of
energy improvements on multifamily rental properties a Regulatory
Activity because of their experience

[[Page 96267]]

demonstrating that energy efficiency and water conservation
improvements help to preserve affordable housing.
Credible Projections
The final rule provides that under this Regulatory Activity, the
projections of energy or water savings must be made based on credible
and generally accepted standards that the improvements will reduce
energy or water consumption by at least 15 percent. This is a change
from the proposed rule, which would have required that there be
``verifiable, reliable projections or expectations'' of reductions in
consumption.
The proposed rule specifically requested comment on whether the
Enterprises should require the lender to verify before the closing of
an energy improvement loan that there are reliable and verifiable
projections or expectations that the proposed energy improvements will
likely reduce the tenant's energy and water consumption and utility
costs and, if so, what standards of reliability, verifiability and
likelihood of reduced consumption and costs should be required. The
proposed rule also asked whether the Enterprises should be required to
verify, after the closing of an energy improvement loan, that the
energy improvements financed actually reduced the tenant's energy and
water consumption and utility costs and, if so, how the Enterprises
could verify this.
Although it was not the intent of the proposed Regulatory Activity
to require verification of energy or water savings after installation
of the improvements, a number of trade associations, policy advocacy
organizations, and affordable housing providers stated that the rule
should not include such a requirement, citing the practical issues
involved. Commenters pointed out that demonstration by a property owner
of an immediate reduction in utility consumption was impractical
because it requires comparing long-term, weather-normalized, pre-
retrofit and post-retrofit usage data. Freddie Mac questioned the
availability of the requisite usage data since utility companies
generally do not share energy consumption figures, for privacy and
operational reasons. Post-retrofit verification is particularly
problematic when a property is undergoing major renovations and no
baseline usage level is readily available.
Freddie Mac and a trade association pointed out that a post-loan
verification requirement would be further complicated by the
Enterprises' inability to monitor and adjust for tenant utility usage
behavior, resulting in inaccurate comparisons between projected and
actual tenant utility consumption. A nonprofit organization with energy
expertise asserted that low-income households that are financially
constrained to very low utility usage might increase usage to a more
normal level once energy or water improvements are installed. In
increasing their utility consumption, financially constrained
households may enhance their quality of life while maintaining the same
level of utility expenses. As the commenter pointed out, because a
comparison of utility usages would not account for tenants' reactions
to improvements, inspectors might wrongly assume that the improvements
failed to address energy or water inefficiencies when in reality the
improvements' effects were offset by tenants' increasing their utility
usage to a more normal level.
A nonprofit organization with energy expertise recommended instead
that the Enterprises require verification that the energy and water
improvements were installed as specified in an energy audit. Other
nonprofit organizations and Freddie Mac supported relying on credible
projections by third-party certifiers and utilizing accepted industry
standards, such as a recognized point value system or a list of
acceptable energy improvements. Additionally, both Enterprises
advocated for Duty to Serve credit for properties that achieve a green
building certification and, therefore, meet a standard for high energy
efficiency.
For properties not earning a green certification, nonprofit
organizations and policy advocacy organizations generally supported
requiring a one-time energy assessment/audit that meets a national
certification standard and is conducted by a qualified third-party
certifier, utility company, or state/local agency in order to avoid
having to conduct a baseline assessment and a follow-up assessment to
verify actual savings. A nonprofit organization recommended that the
scope of the energy audit vary based on the type and extent of the
improvements in order to lower project costs and maintain the cost
effectiveness of smaller improvements.
A trade association opposed requiring energy audits and utility
benchmarking, claiming that audits or benchmarks would prove
challenging and cost prohibitive.
FHFA agrees with the commenters that an after-the-fact verification
requirement would be impractical and overly burdensome. As many
commenters noted, there are several practical issues with post-loan
verifications of energy and water savings. Immediate verifications
would not be possible because the long-term, weather-normalized post-
retrofit data needed for comparison with pre-retrofit data will likely
not be available for at least one year. Moreover, obtaining the
requisite tenant utility usage data would require the property owner to
get permission from the utility companies and employ sampling
techniques, which is further complicated because utility companies
across the country do not consistently capture or store this data.
Additionally, the Enterprises have little ability to monitor and adjust
for tenant utility usage. As a result, a comparison of projected and
actual tenant utility consumption could be inaccurate through no fault
of the lender, energy auditor, or Enterprise.
Instead, as recommended by some commenters, FHFA finds that if a
multifamily property meets a credible and generally accepted standard,
such as the U.S. Green Building Council's Leadership in Energy and
Environmental Design (LEED), EarthCraft, Greenpoint, the National Green
Building Standard (NGBS), or the U.S. Environmental Protection Agency's
(EPA's) ENERGY STAR certifications, or other standards that may be
developed that are credible and generally accepted, then a projected
reduction of at least 15 percent in energy or water consumption can
reasonably be assumed under the standard. Additionally, FHFA finds that
if a property undergoes an energy audit that meets a credible and
generally accepted standard, such as the American Society of Heating,
Refrigerating, and Air-Conditioning Engineers (``ASHRAE'') Level II
Energy Audit, and the audit shows a projection of at least a15 percent
reduction in energy or water consumption, then the project will be
eligible for Duty to Serve credit.
Accordingly, Sec. 1282.34(d)(2) of the final rule replaces the
reference to ``verifiable, reliable projections or expectations'' in
the proposed rule with ``projections made based on credible and
generally accepted standards.''
Utility Savings Exceed Upfront Installation Costs
The final rule provides that under this Regulatory Activity, the
reduced utility savings generated over an improvement's expected life
must be projected to exceed the upfront costs of its installation. This
is a change from the proposed rule, which would have required that the
reduced consumption in a project offset the upfront costs of the
improvement within a reasonable time period.

[[Page 96268]]

The proposed rule specifically requested comment on whether a
``reasonable time period'' should be defined, and, if so, how.
Nonprofit organizations, trade associations, and affordable housing
advocacy groups stated that since the payback period for energy
efficiency improvements can vary widely depending on the type of
improvements and geographic location of the property, requiring a
specified payback period could arbitrarily limit what energy efficiency
improvements lenders are willing to finance. As a result, cost-
effective improvements that would significantly improve property
performance over the long term might not be financed because of long
payback periods. Other trade associations and nonprofit organizations
criticized a specified payback period requirement as potentially
eliminating cost-effective long-term improvements because of smaller
short-term savings.
Based on these concerns, a number of trade associations and
nonprofit organizations recommended instead that the Regulatory
Activity require a Savings-to-Investment Ratio (SIR), a common
benchmark among energy efficiency programs, which allows financing as
long as the lifetime utility savings exceed or are equal to the
installation costs. The commenters pointed out that a SIR equal to or
greater than one suggests that the energy efficiency improvements are
cost-effective.
FHFA agrees that the improvements should be cost-effective in order
to receive Duty to Serve credit. One way to measure this is to use a
SIR or other recognized measure to demonstrate whether the energy
efficiency improvements can provide value to property owners over the
improvement's expected life. This would allow for Duty to Serve credit
as long as the savings generated over an improvement's life exceed or
are equal to the cost of its installation. A SIR of greater than one
ensures that the present value of energy savings exceeds the present
value of the cost of installation and, thus, yields a positive return.
As a methodology common to energy efficiency programs, the SIR's
benefits are well understood among energy efficiency experts.
A key benefit of any cost-benefit analysis such as the SIR is that
it avoids arbitrarily defined payback periods, which could eliminate
cost-effective energy improvements that take longer to realize the full
savings. Decreasing property owners' costs can help preserve affordable
housing. It follows that energy efficiency improvements should be
assessed on the basis of whether or not they yield a long-run positive
return to the property owner, not on the length of their payback
periods.
For these reasons, in a change from the proposed rule, the
Regulatory Activity in the final rule provides that the reduced utility
savings generated over an improvement's expected life must exceed the
cost of installation. Demonstrating that an energy improvement is cost-
effective will only be required for projects undergoing an energy audit
that meets a national standard, because the other methods of credibly
demonstrating reduction in energy and water consumption are presumed to
show that the improvements are cost-effective.
Savings Offset by Higher Rents or Other Charges
The final rule does not include the proposed requirement in this
Regulatory Activity that the reduced utility costs derived from reduced
consumption must not be offset by higher rents or other charges imposed
by the property owner.
Several nonprofit organizations, both Enterprises, an organization
with energy efficiency expertise, and a trade association raised
concerns about the practicality and desirability of the proposed
restriction on increases in rents or other charges. Commenters stated
that the proposed restriction would likely remove the incentive for
property owners to improve their properties, diminishing the number of
properties potentially undergoing upgrades. Consequently, rather than
helping tenants, the proposed restriction could reduce the potential
benefits tenants would receive from living in an upgraded property,
such as improved health and savings on their monthly utility bills.
FHFA finds these comments persuasive and, therefore, has not included
the proposed restriction on increases in rents or other charges in the
final rule.
FHFA notes that tenants who are responsible for paying utilities
costs could still be subject to an increase in their rents or other
charges. FHFA expects the Enterprises to design and implement their
energy efficiency improvement loan programs under this Regulatory
Activity to ensure the preservation of affordable housing, which
includes affordable energy costs. FHFA considered requiring the
Enterprises to use their quality control systems to monitor rental
properties receiving energy efficiency improvements in order to ensure
that the properties' rents remain affordable over time. However, the
final rule does not include such a requirement because there is no
practical way for the Enterprises to undertake this responsibility.
Reduction of Energy or Water Consumption by Tenant or Property
The final rule includes in this Regulatory Activity a requirement
that the energy efficiency improvements reduce energy or water
consumption by the tenant or the property by at least 15 percent. This
is a change from the proposed rule, which would have applied the
requirement only to reductions in energy and water consumption by the
tenant and not by the property as a whole.
Several nonprofit organizations stated that energy efficiency
improvements would provide benefits to tenants from living in an
upgraded property, such as improved health, savings on monthly utility
bills, and increases in the value of the property. Further, the
improvements would likely provide greater stability in the affordable
housing market and decrease the size of future rent increases resulting
from increases in energy or water costs.
Several trade associations, policy advocacy organizations, and
nonprofit organizations recommended revising the proposed Regulatory
Activity to provide Duty to Serve credit not only for a reduction in
energy and water consumption by the tenant, but also by the property as
a whole. The commenters stated that measuring a reduction in energy and
water consumption only by the tenant could miss energy and water
savings in common areas of multifamily buildings and remove the
incentive for property owners to improve their properties.
After considering the comments, FHFA finds the arguments compelling
that the proposed requirement would likely remove the incentive for
property owners to improve their properties, thereby diminishing the
benefits to the tenants and hindering affordable housing preservation.
For these reasons, the Regulatory Activity in the final rule includes
reductions in energy or water consumption by the tenant or the property
as a whole.
When an Enterprise is considering whether to include this
Regulatory Activity for energy efficiency improvements on multifamily
rental properties in its Plan, FHFA encourages the Enterprise to
specifically consider objectives related to collecting utility usage
data and utility benchmarking. FHFA finds that utility benchmarking
creates a wide variety of benefits for owners, tenants, and the public.
Utility benchmarking helps building owners

[[Page 96269]]

discover billing errors and malfunctioning equipment which, once
corrected, can result in immediate financial savings. Collecting
utility data can also save tenants money by identifying areas where
they can realize savings and enhance comfort. The EPA currently offers
free utility benchmarking software--Energy Star Portfolio Manager--to
collect and analyze utility data.\73\ Additionally, a multifamily
Energy Star Score, which compares a multifamily building's energy and
water use intensity to like buildings, is available from EPA for
buildings with greater than 20 units.
---------------------------------------------------------------------------

\73\ https://www.energystar.gov/buildings/facility-owners-and-managers/existing-buildings/use-portfolio-manager.
---------------------------------------------------------------------------

Efficiency Improvements That Reduce Energy or Water Consumption
The final rule includes in this Regulatory Activity a requirement
that the energy efficiency improvements reduce energy or water
consumption by at least 15 percent. This is a change from wording of
the proposed rule, which was interpreted by some commenters to require
that the energy efficiency improvements reduce both energy and water
consumption by at least 15 percent.
Both Enterprises recommended making this change. Fannie Mae stated
that many quality projects would not be able to reduce both energy and
water consumption at the same time because improvements typically are
undertaken addressing only one of these types of consumption at a given
time. Freddie Mac stated that energy and water are separate utilities,
and their consumption involves distinct behaviors and technology.
Freddie Mac further stated a belief that FHFA's intent was to promote
both energy and water efficiency improvements, but not to require the
achievement of both simultaneously.
FHFA's intent was not to mandate that the improvements address both
energy and water consumption at the same time. Instead, any energy or
water improvements could be used to project a reduction in the
respective utility consumption by at least 15 percent. FHFA recognizes
that requiring reductions in both energy and water efficiency might
arbitrarily restrict cost-effective improvements that address only
energy- or water-related inefficiencies. Accordingly, the reference in
the proposed Regulatory Activity to reducing energy and water
consumption is changed in the final rule to reducing energy or water
consumption.
(iii) Energy or Water Efficiency Improvements in Single-Family, First
Lien Properties--Sec. 1282.34(d)(3)
Section 1282.34(d)(3) of the final rule establishes a Regulatory
Activity for Enterprise support for financing energy or water
efficiency improvements on single-family, first lien properties, with
similar modifications from the proposed rule as made for the Regulatory
Activity for energy efficiency improvements on multifamily properties
discussed above. Under this revised Regulatory Activity, Enterprise
support for financing of energy or water efficiency improvements is
eligible for Duty to Serve credit provided there are projections made
based on credible and generally accepted standards that (1) the
improvements financed by the loan will reduce energy or water
consumption by the homeowner, tenant, or the property by at least 15
percent, and (2) the utility savings generated over an improvement's
expected life will exceed the cost of installation.
As with multifamily rental properties, preservation of affordable
single-family properties (homeownership or rental) may also encompass
lowering home energy and water costs. Lowering energy and water costs
can help a homeowner or tenant to continue to afford mortgage or rent
payments, as well as other housing costs.
The comments on this Regulatory Activity mirrored the comments that
FHFA received on corresponding requirements for the Regulatory Activity
for energy efficiency improvements on multifamily rental properties
discussed above.
Credible Projections
As addressed above in the discussion of the Regulatory Activity for
energy efficiency improvements on multifamily properties, there are two
types of credible and generally accepted standards for projecting
energy savings of 15 percent or more from energy efficiency
improvements on the property--a certification such as LEED or EPA
ENERGY STAR, and energy audits.\74\
---------------------------------------------------------------------------

\74\ A manufactured home that has met a credible and generally
accepted standard for projecting energy savings, such as the Energy
Star certification, would be eligible for Duty to Serve credit under
this energy efficiency Regulatory Activity.
---------------------------------------------------------------------------

These certifications and energy audits may also be used to project
energy savings under the Regulatory Activity for energy efficiency
improvements on single-family properties. A credible and generally
accepted standard for demonstrating energy improvements on a single-
family property is to undergo an energy audit that meets a generally
accepted standard, such as the Home Energy Rating System, the
Department of Energy's Home Energy Scoring Tool, or an audit conducted
by a qualified auditor/assessor trained and certified by the state or
the Building Performance Institute.\75\ In order to receive Duty to
Serve credit through the use of an energy audit, the assessment needs
to show a projection of at least a 15 percent reduction in energy or
water consumption.
---------------------------------------------------------------------------

\75\ See, for example, qualified assessors permitted for FHA's
Energy Efficient Mortgage Program at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/eem/energy-r.
---------------------------------------------------------------------------

A number of nonprofit, trade association, and state government
entities noted, however, that requiring very low-, low-, and moderate-
income families to verify savings by paying for an energy audit, which
typically costs $300-$600, is likely to inhibit Duty to Serve program
participation. Additionally, for households that can afford an energy
audit, requiring one in all cases would likely limit Duty to Serve
credit to only energy efficiency improvements occurring as part of a
major single-family property rehabilitation that would justify the
upfront costs of the improvements. Nonprofit organizations recommended
allowing homeowners to utilize one of the many successful state, local,
tribal, or utility energy savings programs for which they may qualify.
A state housing finance agency commented that partnering with state and
local programs has the potential to provide additional resources to
benefit low-income homeowners while simultaneously reducing risk to the
Enterprises. An FHFA analysis of successful state, local, tribal, and
utility programs shows that almost all of them have well-established
lists of qualifying products or methodologies that generate energy
savings and reduce consumption. These lists would streamline the
process of demonstrating credible savings and present homeowners with
options for implementing improvements that are projected to bring them
predictable energy savings.
FHFA finds the comments compelling for including this third option
for projecting energy savings in the Regulatory Activity for energy
efficiency improvements on single-family properties. This could help
expand the availability and use of energy efficiency improvement loan
products and, thus, help preserve affordable single-family housing.
FHFA expects the Enterprises to use their quality control systems to

[[Page 96270]]

monitor the quality of state, local, tribal, and utility programs to
ensure that these programs effectively encourage cost-effective
improvements.
(iv) Preservation of Long-Term Affordable Homeownership Through Shared
Equity Programs--Sec. 1282.34(d)(4)
For affordable homeownership, there are no regulatory agreements
similar to those with affordable rental properties that expire after
certain regulatory periods, such as 15 years, 20 years, or 30 years.
Rather, preservation for affordable homeownership entails ensuring that
the price of the home is affordable over a long-term period to initial
and subsequent purchasers, whether purchasing a newly constructed home
or an existing home. Certain shared equity programs, which offer this
type of sustainable affordable homeownership, fit within the final
rule's interpretation of ``preservation.''
Consistent with the proposed rule, Sec. 1282.34(d)(4) of the final
rule establishes a Regulatory Activity for Enterprise activities
related to affordable homeownership preservation through shared equity
programs. The approach to shared equity in the final rule closely
tracks the proposed rule approach, with certain modifications based on
the comments received.\76\ The purpose of this Regulatory Activity is
to help income-eligible families build wealth through sustainable
homeownership.
---------------------------------------------------------------------------

\76\ A detailed discussion of the various models and operation
of shared equity homeownership programs and further rationale for
establishing a Regulatory Activity for affordable homeownership
preservation are in the SUPPLEMENTARY INFORMATION for the proposed
rule, 80 FR at 79182, 79202-79204 (Dec. 18, 2015).
---------------------------------------------------------------------------

Shared equity programs are divided into: (i) Resale restriction
programs, where the resale price is explicitly limited, and (ii) shared
appreciation loan programs, where second mortgage loans are due upon
sale and typically--but not necessarily--structured with zero percent
interest. While the shared appreciation subsidy retention vehicle is
technically a second mortgage, it does not have many of the features
commonly associated with mortgage debt. Shared appreciation second
mortgage loans that function as subsidy retention vehicles and do not
expose borrowers or the Enterprises to the risks associated with
typical second mortgage loans are eligible for Duty to Serve credit.
Properties that were purchased with shared appreciation loans sell
at market value, but the homeowner repays the loan amount and a portion
of the appreciation to the nonprofit organization or state or local
government entity administering the program. The program administrator
uses its share of the appreciation to make the same home affordable to
a subsequent income-eligible homebuyer. In the shared appreciation
model, the administering entity may form a partnership with a for-
profit lender that provides shared appreciation loans if the nonprofit
organization or state or local government entity does not itself make
qualifying loans.
Resale restriction programs and shared appreciation programs have
the following common characteristics specified in the final rule:
(1) Provide homeownership opportunities to very low-, low-, or
moderate-income families;
(2) Utilize a ground lease, deed restriction, subordinate loan or
similar legal mechanism that includes a provision that the program will
keep the home affordable for subsequent very low-, low-, or moderate-
income families, an affordability term of at least 30 years after
recordation, a resale formula that limits the homeowner's proceeds upon
resale, and a preemptive option for the program administrator or its
assignee to purchase the homeownership unit from the homeowner at
resale; and
(3) Support the homeowners to promote sustainable homeownership for
very low-, low-, or moderate-income families, including reviewing and
pre-approving refinances or home equity lines of credit.
Over 30 comment letters addressed the proposed shared equity
homeownership provisions. Commenters included both Enterprises, a local
government, local and national nonprofit organizations including some
that are engaged in shared equity programs and some that specialize in
multifamily rental housing, a state housing finance agency, an
academician, and others. Most of the commenters supported the proposed
Regulatory Activity because they said this model is the way to most
efficiently help as many families as possible build wealth through
sustainable homeownership.
A nonprofit affordable multifamily rental housing developer and a
trade organization representing nonprofit affordable multifamily rental
housing providers opposed the proposed Regulatory Activity. The
commenters stated that the Duty to Serve should focus on affordable
housing preservation for multifamily rental housing rather than for
homeownership based on their interpretation of the statute as applying
only to rental housing preservation and because they believe renters'
needs are more acute than homebuyers' needs.
FHFA has considered these comments and has decided to adopt the
Regulatory Activity in the final rule for shared equity homeownership.
While multifamily rental housing is an essential part of affordable
housing preservation, FHFA does not interpret the statute as being
limited to preservation of affordable rental housing. In addition, the
multifamily and single-family business units in both Enterprises are
sufficiently distinct from each other that establishing a Regulatory
Activity for affordable homeownership preservation should not
materially detract from Enterprise efforts to preserve the
affordability of multifamily rental housing.
The academician commented that Duty to Serve credit should be based
on successful homeownership rather than homeownership creation. Among
the main reasons that FHFA has chosen to encourage shared equity models
in the Duty to Serve is that risk mitigation, sustainability, and
affordability for the new homebuyer are built into the shared equity
product design.
Several commenters urged FHFA to include an explicit homeownership
counseling requirement in the Regulatory Activity to ensure successful
homeownership. The final rule does not include a counseling requirement
because almost all shared equity programs already include effective
homeownership counseling, and it could result in shared equity programs
having to meet differing counseling requirements from each Enterprise
and from lenders. Instead, FHFA has added in the final rule a specific
requirement that the shared equity program administrators review and
pre-approve refinances or home equity lines of credit, which require a
greater ongoing role to support homeowners. This requirement also gives
the Enterprises a specific way to determine whether the program
administrators are promoting successful homeownership.
Fannie Mae endorsed including Enterprise support of shared equity
homeownership programs in the final rule, and made several specific
suggestions to facilitate smoother mortgage loan purchases which have
been carefully considered in the modifications made in the final rule.
Consistent with Freddie Mac's overall comment favoring Additional
Activities over Regulatory Activities, Freddie Mac suggested that
Enterprise support for shared equity programs be an Additional Activity
or extra credit activity, rather than a Regulatory Activity, on the
basis that the

[[Page 96271]]

Enterprises should not be required to consider any activities.
A trade association of shared equity providers suggested that the
proposed preemptive purchase option requirement, discussed above, is
sufficient to ensure the long-term affordability of an ownership unit,
without the need for the additional proposed requirement that the unit
be preserved for a longer period when state law permits a longer period
than 30 years. Freddie Mac favored state or local law determining the
periods of affordability on the basis that using state law definitions
of affordability might expand the shared equity market.
Eliminating the proposed requirement that the affordability period
exceed 30 years when permitted by state law would reduce complexity in
the loan origination process, and avoid the potential problem of a
preservation period being longer than the loan term. FHFA is persuaded
by these comments. Accordingly, the final rule omits the requirement in
the proposed rule that a unit be preserved for a longer period when
state law permits a longer period than 30 years.
The trade association also suggested clarifying how nonprofit and
for-profit organizations, which administer the shared appreciation
programs, could collaborate under the Regulatory Activity. The
commenter noted that the shared equity market is small, and most
nonprofit organizations and state and local governments do not
originate mortgage loans. FHFA finds that partnerships between
nonprofit organizations or state or local governments and for-profit
lenders could help achieve the scale that would make the shared
appreciation market more viable. Because shared appreciation loans must
be underwritten, the Enterprises could develop shared appreciation loan
products that they would be willing to purchase from private mortgage
lenders partnering with the nonprofit organizations or state or local
governments, who would monitor resales and support homeowners. Freddie
Mac also requested clarification that the shared appreciation programs
could be administered by for-profit entities so long as a nonprofit
entity participates in the program.
FHFA is persuaded by these comments. Accordingly, in a change from
the proposed rule, the final rule provides that shared appreciation
programs administered by nonprofit organizations or state or local
governments that enter into partnerships with for-profit lenders who
provide the shared appreciation loans, are included in this Regulatory
Activity.
The provision in the proposed rule that would have required the
Enterprises to monitor homeownership units to ensure affordability is
preserved over resales is not included in the final rule. FHFA has
determined that this provision is not specific enough to facilitate
Enterprise monitoring to ensure preservation of affordability over
resales. Instead, the proposed 30-year affordability term requirement,
the proposed preemptive option to purchase requirement, and a new
requirement limiting proceeds at resale, all of which are included in
the final rule, should ensure that affordability is preserved at
resales without the Enterprises having to actively monitor the resales.
FHFA expects that the Enterprises will document, at the time they
purchase shared equity loans, that the loans are part of a structure
meeting the above requirements.
(v) Preservation of Affordable Housing Through the Choice Neighborhoods
Initiative--Sec. 1282.34(d)(5)
Consistent with the proposed rule, Sec. 1282.34(d)(5) of the final
rule establishes a Regulatory Activity for Enterprise activities
supporting financing for HUD's Choice Neighborhoods Initiative (CNI).
Created after the enactment of HERA, CNI seeks to preserve and
transform distressed, HUD-supported affordable housing. CNI focuses on
creating mixed-income housing and investing in neighborhood
improvements and upgrades.
The proposed rule specifically requested comment on whether
Enterprise activities supporting CNI should be considered a
``residential economic diversity'' activity, rather than a Regulatory
Activity under the affordable housing preservation market.
Several nonprofit organizations favored making Enterprise
activities supporting CNI a Regulatory Activity under the affordable
housing preservation market, rather than under residential economic
diversity. Another commenter recommended making CNI activities both a
Regulatory Activity under the affordable housing preservation market
and a residential economic diversity activity, given the large need for
Enterprise support of neighborhood revitalization efforts.
FHFA has determined that establishing a Regulatory Activity for
Enterprise activities supporting CNI will sufficiently encourage the
Enterprises to consider such activities. Separately, FHFA has decided
not to add a neighborhood revitalization component under residential
economic diversity activities (see Section IV. Extra Credit-Eligible
Activities--Sec. 1282.36(c)(3)). Accordingly, the final rule retains
the proposed rule's approach.
(vi) Preservation of Affordable Housing Through the Rental Assistance
Demonstration Program--Sec. 1282.34(d)(6)
Consistent with the proposed rule, Sec. 1282.34(d)(6) of the
final rule establishes a Regulatory Activity for Enterprise activities
supporting financing for HUD's Rental Assistance Demonstration (RAD).
RAD seeks to improve and preserve distressed, HUD-supported affordable
housing by allowing public housing authorities to access outside
sources of capital for renovation and preservation.
A number of nonprofit organizations and one Enterprise favored
establishing a Regulatory Activity for Enterprise activities supporting
RAD, arguing that Enterprise support for RAD is consistent with other
activities in the affordable housing preservation market.
A trade organization stated that the RAD program was too small to
warrant inclusion as a Regulatory Activity, and that the Enterprises
should instead be encouraged to creatively and innovatively support the
underserved markets.
FHFA has determined that financing debt associated with RAD is an
important way that the Enterprises can support affordable housing
preservation. RAD has already supported conversions of more than 30,000
units and resulted in over $2 billion in needed rehabilitation. \77\
The program also appears likely to support preservation of additional
units into future. Accordingly, consistent with the proposed rule, the
final rule establishes a Regulatory Activity for Enterprise activities
supporting RAD. Additionally, FHFA clarifies that both RAD Component 1
(applicable to public housing) and Component 2 conversions (applicable
to Rent Supplement, Rental Assistance Payments, and Mod Rehab
contracts) are eligible under this Regulatory Activity.
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\77\ http://portal.hud.gov/hudportal/documents/huddoc?id=RAD_Newsltr_Summer2016.pdf.
---------------------------------------------------------------------------

(vii) Purchase or Rehabilitation of Certain Distressed Properties--
Sec. 1282.34(d)(7)
Section 1282.34(d)(7) of the final rule establishes a Regulatory
Activity for Enterprise activities that facilitate financing the
purchase or rehabilitation by very low-, low-, or moderate-income
families or by nonprofit organizations or local or tribal governments
serving such

[[Page 96272]]

income-qualifying families, of homes eligible for a short sale, homes
eligible for a foreclosure sale, or a property that a lender acquires
as the result of foreclosure (sometimes referred to as ``Real Estate
Owned'' or ``REO''). This Regulatory Activity was not included in the
proposed rule.
In response to a question FHFA asked in the proposed rule on how to
interpret ``preservation,'' some nonprofit organizations and policy
advocacy organizations commented together that FHFA include in its
interpretation of preservation activities that literally preserve the
physical integrity, habitability, and functionality of properties
located in neighborhoods with naturally occurring affordable housing.
FHFA finds that financing to address blighted properties is critical to
preserve the affordability of those properties as well as naturally
occurring affordability in their surrounding neighborhoods.
Accordingly, FHFA's interpretation of ``preservation'' includes the
Regulatory Activity established in Sec. 1282.34(d)(7). FHFA will
provide additional guidance on such purchase and rehabilitation in the
Evaluation Guidance.
The proposed rule discussed the important role the Enterprises can
play in stabilizing neighborhoods but did not include purchasing and
rehabilitating distressed properties as a specific Regulatory Activity.
Local neighborhood stabilization programs were discussed in the
proposed rule, and are discussed under Sec. 1282.34(c)(9) above, as
examples of ``comparable state and local affordable housing programs''
that an Enterprise could include in its Plan to address foreclosure and
abandonment prevention programs benefiting Duty to Serve income-
eligible households. A number of commenters, primarily organizations
that advocate for stabilizing disinvested neighborhoods, recommended
providing Duty to Serve credit for Enterprise activities that support
local neighborhood stabilization programs to combat the deterioration
of foreclosed and abandoned homes and the destabilizing effect those
properties have on low-income neighborhoods. The commenters urged FHFA
to be more aggressive in overseeing the Enterprises' management of
their foreclosed properties and urged FHFA to ensure that the
Enterprises have effective policies and practices to preserve
foreclosed properties in the best possible condition. Some of the
commenters recommended giving the Enterprises Duty to Serve credit for
responsible disposition of REO stock, such as under FHFA's Neighborhood
Stabilization Initiative (NSI).\78\
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\78\ See NSI Fact Sheet 11/10/2015, available at http://www.fhfa.gov/PolicyProgramsResearch/Programs/Pages/Neighborhood-Stabilization-Initiative.aspx. The NSI was launched as a pilot to
facilitate the disposition of REO properties in ways that will
stabilize neighborhoods. Id. The NSI leverages the National
Community Stabilization Trust, a national nonprofit organization
that works closely with local governments and other community
resources to make informed decisions on treatment of individual
properties. Id.
---------------------------------------------------------------------------

FHFA agrees that problems related to foreclosed and abandoned
properties can create blight and other negative economic, social, and
health outcomes for neighborhoods. Distressed properties threaten the
values of surrounding properties and ultimately the stability of
neighborhoods. Many of these properties require extensive repairs, but
homeowners in the Duty to Serve income-qualifying range often face
difficulties obtaining financing to make those repairs. Potential
homebuyers in this income-qualifying range also often face difficulties
obtaining financing to purchase distressed properties. Establishing a
Regulatory Activity in the final rule for Enterprise support for such
financing could help address the credit gap for these homeowners,
potential homebuyers, and nonprofit organizations.
While both Enterprises already offer purchase money mortgage
products targeting lower-income families, in the neighborhood
stabilization context there is a need not only for purchase money
mortgages, but also for loan products that support repairs,
rehabilitation, and demolition work. Several commenters also cited a
need for loan products that address the breakdowns in markets that
occur when appropriate comparison data is not available to support home
appraisals. The Duty to Serve presents an opportunity to complement
existing neighborhood stabilization programs and efforts, such as the
NSI, with financing tools that could jump-start neighborhood
stabilization efforts. Some economists suggest that homeowners are more
likely than other buyers to invest in their homes, neighborhoods and
local economies.\79\
---------------------------------------------------------------------------

\79\ See generally Atif Mian and Amir Sufi, ``House of Debt: How
They (and You) Caused the Great Recession, and How We Can Prevent It
from Happening Again'' (consumers underwater on their mortgages--
even those who are current on payments--consume less, thereby
weakening local economies), available at http://press.uchicago.edu/ucp/books/book/chicago/H/bo20832545.html.
---------------------------------------------------------------------------

Investors often profit from the lack of credit availability for
repair and rehabilitation of vacant and abandoned homes because
investors have credit access that individual homeowners and nonprofit
organizations operating in distressed communities often lack. An
Enterprise loan product for purchase or rehabilitation of distressed
properties could enable income-qualifying homeowners, as well as
nonprofit organizations or local or tribal governments acting on behalf
of homeowners and renters, to obtain rehabilitation financing without
involving for-profit investors, thereby ensuring that more of the
benefits of financing flow to homeowners.
FHFA finds the commenters' arguments and the need for financing for
distressed properties compelling. Accordingly, the final rule
establishes a Regulatory Activity for Enterprise support of financing
for certain distressed properties.
FHFA considered limiting this Regulatory Activity to homes located
only in blighted neighborhoods, where most vacant and abandoned homes
are found. However, FHFA determined that very low-, low-, and moderate-
income families also should have the opportunity to purchase vacant and
abandoned homes in other areas. Accordingly, the final rule sets no
geographic limits on this Regulatory Activity.
There are key differences between this Regulatory Activity and the
NSI, which is not part of the Duty to Serve. First, this Regulatory
Activity targets all homes eligible for a short sale, eligible for a
foreclosure sale, or REO, rather than just homes owned by the
Enterprises. Second, this Regulatory Activity supports the financing of
repairs, rehabilitations, and demolitions, in addition to simply
purchase money mortgages. Third, this Regulatory Activity targets the
purchase or rehabilitation of vacant and in default or abandoned homes,
rather than the sale or disposition of those homes.
The Duty to Serve is limited under the statute to support for
financing products that promote affordable housing or neighborhood
stabilization.\80\ Therefore, Duty to Serve credit is not available for
Enterprise activities under the NSI or for any neighborhood
stabilization efforts other than stabilization efforts directly related
to creating Enterprise loan purchase products.
---------------------------------------------------------------------------

\80\ See 12 U.S.C. 4565(a)(1).
---------------------------------------------------------------------------

Enterprise loan purchase products that could receive Duty to Serve
credit under this Regulatory Activity include those that support
purchases, repairs, rehabilitations, or demolition work on homes
eligible for short sale, homes eligible for foreclosure sale, or REO,
including rental homes. Loan products that reach Duty to Serve income-
eligible families through nonprofit organizations

[[Page 96273]]

or local or tribal governments are also included in the Regulatory
Activity. This Regulatory Activity extends to purchase loans and
rehabilitation loans regardless of who owns the loan or the home, or
the neighborhood in which the home is located, as long as the loan
product includes Enterprise control of the resulting first mortgage
loan.
(e) Additional Activities
Section 1282.37(c)(2) of the final rule also sets out requirements
for eligible Additional Activities in the affordable housing
preservation market, specifying that these activities must preserve
affordability of existing affordable housing. Preservation can include
Additional Activities that involve preserving existing subsidy where
the term of affordability required for the subsidy is followed, or
where there is a deed restriction for the life of the loan. It may also
involve preserving the affordability of properties in conjunction with
state or local inclusionary zoning, real estate tax abatement, or loan
programs, where a regulatory agreement, recorded use restriction, or
deed restriction maintains affordability of a portion of the property's
units for the term defined by the state or local program.
3. Rural Markets--Sec. 1282.35
The below section describes the final rule provisions for the rural
market and explains FHFA's rationale for adopting four Regulatory
Activities for this market. The four Regulatory Activities are: (1)
High-needs rural regions; (2) high-needs rural populations; (3)
financing by small financial institutions of rural housing; and (4)
small multifamily rental properties in rural areas. The below section
also explains FHFA's definitions of ``rural area,'' ``high-needs rural
areas,'' and ``high-needs rural populations,'' which have been expanded
from those in the proposed rule.
a. Regulatory Activities
Section 1282.35(c)(1)-(4) of the final rule identifies four
specific types of activities as Regulatory Activities under the rural
markets. Two of these Regulatory Activities--Enterprise activities
supporting high-needs rural regions and Enterprise activities
supporting high-needs rural populations--were included in the proposed
rule under one Regulatory Activity. The other two Regulatory
Activities--Enterprise activities related to the financing of housing
by rural small financial institutions and Enterprise activities related
to the financing of small multifamily rental properties in rural
areas--are new. The Regulatory Activities and definition of ``rural
area'' are discussed below.
Definition of ``Rural Area''--Sec. 1282.1
Section 1282.1 of the final rule defines ``rural area'' as: (1) A
census tract outside of a metropolitan statistical area (MSA) as
designated by the Office of Management and Budget (OMB); or (2) a
census tract in an MSA but outside of the MSA's Urbanized Areas as
designated by the U.S. Department of Agriculture's (USDA) Rural-Urban
Commuting Area (RUCA) Code #1,\81\ and outside of tracts with a housing
density of more than 64 housing units per square mile in USDA's RUCA
Code #2.\82\ This is a change from the proposed rule, which also relied
on USDA RUCA codes. The proposed rule's definition included the first
prong in the final rule's definition of ``rural area''--a census tract
outside of an MSA as designated by OMB. However, the proposed rule's
definition excluded all Urbanized Areas and Urban Clusters--RUCA Codes
1, 4, and 7--within an MSA from being considered rural.
---------------------------------------------------------------------------

\81\ RUCA Code #1 is a tract that is in an urbanized area within
a metropolitan area (a town with over 50,000 people).
\82\ RUCA Code #2 describes a tract where 30 percent or more of
the population commutes to a town with 50,000 people or more.
---------------------------------------------------------------------------

There is no single, universally accepted definition of ``rural
area'' because varying definitions achieve different policy
objectives.\83\ FHFA developed its definition of ``rural area'' for the
Duty to Serve based on three primary criteria: (1) The definition
should be broad enough to include rural residents living in outlying
counties of metropolitan areas; (2) the definition should remain stable
over time to support the Enterprises' Plans; and (3) the definition
should remain easy to implement and operationalize by the Enterprises.
As discussed in the SUPPLEMENTARY INFORMATION to the proposed rule,
FHFA considered the U.S. Census Bureau, CFPB, and USDA definitions of
``rural'' but determined that the definition it proposed would better
serve the Duty to Serve policy objectives under these three criteria.
---------------------------------------------------------------------------

\83\ See generally David A. Fahrenthold, ``What does rural mean?
Uncle Sam has more than a dozen answers,'' Washington Post (June 8,
2013), available at http://www.washingtonpost.com/politics/what-does-rural-mean-uncle-sam-has-more-than-a-dozen-answers/2013/06/08/377469e8-ca26-11e2-9c79-a0917ed76189_story.html.
---------------------------------------------------------------------------

The USDA definition of ``rural'' is based on the Housing Act of
1949 and defines ``rural'' areas generally as those that are not part
of or associated with an urban area and that meet certain population
thresholds, along with requirements associated with those
thresholds.\84\ The CFPB definition defines ``rural'' as counties that
are outside of MSAs and outside of micropolitan statistical areas
adjacent to MSAs, as well as census blocks designated as ``rural'' by
the U.S. Census Bureau.\85\ The U.S. Census Bureau designates rural
areas as those outside of Urban Areas and Urban Clusters based on the
decennial Census.\86\ FHFA developed its proposed definition by
considering its criteria for a definition of ``rural area,'' the USDA,
CFPB, and U.S. Census Bureau definitions of ``rural,'' and comments on
the 2010 Duty to Serve proposed rule.
---------------------------------------------------------------------------

\84\ 42 U.S.C. 1490.
\85\ See 80 FR 59944, 59968 (Oct. 2, 2015), to be codified at 12
CFR 1026.35(b)(2)(iv)(A), effective January 1, 2016.
\86\ See United States Census Bureau, ``Urban and Rural
Classification,'' Web. 20 (Feb. 2015), available at https://www.census.gov/geo/reference/ua/urban-rural-2010.html.
---------------------------------------------------------------------------

Both Enterprises supported the proposed definition of ``rural
area'' but did not expound on their rationale. A trade association
similarly supported FHFA's proposed definition but did not elaborate on
why it preferred the definition.
A nonprofit organization, a state housing finance agency, and
several policy advocacy organizations preferred the USDA definition of
``rural,'' stating that it is well understood and its limitations are
already accepted by the market. However, FHFA has determined that the
commenters did not provide any compelling evidence addressing how the
USDA definition meets FHFA's primary criteria discussed above for a
definition of ``rural area.''
Several commenters, including nonprofit organizations, policy
advocacy organizations, and a state housing finance agency, recommended
modification of the proposed definition of ``rural area.'' The
commenters stated that the proposed definition is overly inclusive
within metropolitan areas by including suburban/exurban communities
that are not truly rural in character, and overly restrictive within
metropolitan areas by excluding certain small towns, particularly in
the Western U.S., that are truly rural in character.
FHFA has decided to modify the proposed definition of ``rural
area'' in the final rule in accordance with these comments to more
accurately target areas that are truly rural in character and exclude
those that are more realistically classified as suburban/exurban
communities, which do not share the challenges to accessing credit that
rural markets face. FHFA has determined that the revised definition

[[Page 96274]]

will best serve the policy objectives of the Duty to Serve.
The modified definition in the final rule maintains the first part
of the definition of ``rural area'' from the proposed rule--a census
tract outside of an MSA as designated by OMB. The final rule's
definition allows micropolitan areas and small towns to be considered
rural. These tracts, described by RUCA Codes #4 \87\ and #7,\88\ were
excluded in the proposed rule's definition. In addition, the final rule
eliminates tracts described by RUCA Code #2 \89\ that have a housing
density threshold of more than 64 units per square mile from being
considered rural. Such tracts would have been classified as rural areas
under the proposed rule's definition. FHFA added the threshold of more
than 64 units per square mile in order to differentiate suburban/
exurban tracts from rural tracts within RUCA Code #2.
---------------------------------------------------------------------------

\87\ RUCA Code #4 describes a tract that is in a micropolitan
area with a primary commuting flow within a large urban cluster of
10,000 to 49,999 people.
\88\ RUCA Code #7 describes a tract that is in a small town with
a primary commuting flow within a small urban cluster of 2,500 to
9,999 people.
\89\ RUCA Code #2 describes a tract where 30 percent or more of
the population commutes to a town with 50,000 people or more.
---------------------------------------------------------------------------

FHFA modeled the final rule's definition of ``rural area'' on the
definition proposed by a national nonprofit organization, the Housing
Assistance Council, which was echoed by several other commenters. The
threshold measure of housing density of 64 units per square mile, also
recommended by the Housing Assistance Council and other commenters, was
chosen because it is an accepted methodology.\90\ For example, the USDA
Forest Service classifies private forest lands as exurban/urban if they
have more than 64 housing units per square mile.\91\ These
modifications, while adding minor complexity to the definition, meet
FHFA's criteria and objectives for the definition of ``rural area.''
The modifications result in a definition that targets areas that are
truly rural in character while excluding areas that are suburban/
exurban and already well served by the Enterprises. In order to make
the definition easy to implement and operationalize, FHFA will provide
to the Enterprises, and post on FHFA's Web site, a data file that lists
all of the census tracts that are eligible under the final rule's
definition of ``rural area.'' The Enterprises are encouraged to
incorporate the data file into mapping and other tools that can further
facilitate use of the final rule's definition.
---------------------------------------------------------------------------

\90\ David M. Theobold, ``Land-Use Dynamics beyond the American
Urban Fringe,'' Geographical Review, Vol. 91, No.3 (July 2001), pp.
544-564.
\91\ ``Forests on the Edge--Housing Development of America's
Private Forests,'' U.S. Department of Agriculture, Forest Service
(May 2005).
---------------------------------------------------------------------------

(i) Housing in High-Needs Rural Regions--Sec. 1282.35(c)(1)
Section 1282.35(c)(1) of the final rule establishes a Regulatory
Activity for Enterprise support for financing of housing located in
high-needs rural regions. Section 1282.1 of the final rule defines a
``high-needs rural region'' as any of the following regions located in
a rural area: (i) Middle Appalachia; (ii) the Lower Mississippi Delta;
(iii) a colonia; or (iv) a tract located in a persistent poverty county
and not included in Middle Appalachia, the Lower Mississippi Delta, or
a colonia. This definition is similar to the definition in the proposed
rule, with the addition of rural tracts located in persistent poverty
counties as provided in (iv) above. The final rule also makes a change
to the definition of ``colonia.'' Changes from the proposed rule are
discussed below.
FHFA chose the proposed rural regions for a Regulatory Activity
because they are characterized by a high concentration of poverty and
substandard housing conditions. The proposed rule specifically
requested comment on whether Enterprise support for housing for high-
needs rural regions and high-needs rural populations should be a
Regulatory Activity. A number of policy advocacy organizations,
nonprofit organizations, government entities, and a trade association
supported including the proposed high-needs rural regions and rural
populations as a Regulatory Activity, stating that there are extensive
challenges to serving these regions and populations, and that these
regions and populations have historically lacked necessary investment.
Additionally, in FHFA's discussions with both Enterprises, the
Enterprises highlighted certain regions and populations, such as
colonias and members of a Federally recognized Indian tribe in an
Indian area, as unique areas and populations that will likely take
significant time and resources in order to make a meaningful difference
to improve housing conditions.
To create an incentive for the Enterprises to serve both high-needs
rural regions and high-needs rural populations, the final rule splits
this category into two separate Regulatory Activities. FHFA concludes
that this change could lead the Enterprises to devise more narrowly
tailored and responsive strategies to target the unique challenges in
these high-needs rural regions and populations.
Significant data gaps exist in rural areas in part because under
the Home Mortgage Disclosure Act, financial institutions with $44
million or less in assets or that do not have a branch in a
metropolitan area are not required to collect and publicly disclose
data on loans for home purchases and home improvements, or data on
refinancings.\92\ FHFA has determined that more granular data on rural
areas could help the Enterprises, researchers, housing providers, and
mortgage lenders better understand the characteristics and housing and
credit needs of these areas, including high-needs rural regions and
high-needs rural populations, and how best to serve them. To address
these data gaps, FHFA encourages the Enterprises to collect and share
granular data with researchers, lenders, and housing providers.
---------------------------------------------------------------------------

\92\ See Federal Financial Institutions Examination Council, ``A
Guide to HMDA Reporting: Getting It Right!'' (2013); Consumer
Financial Protection Bureau, ``2016 Informational Guide Letter''
(2015), available at https://www.ffiec.gov/hmda/pdf/2016letter.pdf.
---------------------------------------------------------------------------

The final rule makes several changes or clarifications to the
definitions of the specific high-needs rural regions from those in the
proposed rule, as discussed below.
a. Middle Appalachia. Consistent with the proposed rule, the final
rule includes Middle Appalachia as a high-needs rural region. There was
widespread support from commenters, including several nonprofit
organizations and policy advocacy organizations, for including Middle
Appalachia in the specific high-needs rural regions identified by FHFA
in the proposed rule, due to the neglect and persistent poverty the
region faces. Neither Enterprise took a position on including Middle
Appalachia as a high-needs rural region. The proposed rule discussed
generally the Appalachian Regional Commission's (ARC) definition of
``Middle Appalachia'' as a sub-region of Appalachia consisting of 230
ARC-designated counties in Kentucky, North Carolina, Ohio, Tennessee,
Virginia, and West Virginia. The ARC definition of ``Middle
Appalachia'' was not specifically included in the proposed Sec.
1282.1. Commenters did not recommend changes to the ARC definition for
purposes of this Regulatory Activity, but Fannie Mae requested that
FHFA incorporate a specific definition of ``Middle Appalachia'' in the
final rule text.
FHFA has determined that incorporating a specific definition of

[[Page 96275]]

``Middle Appalachia'' in the final rule text can assist the Enterprises
in proposing their activities under the Duty to Serve. Accordingly,
Sec. 1282.1 of the final rule defines ``Middle Appalachia'' as the
``central'' sub-region of Appalachia under the Appalachian Regional
Commission's subregional classification of Appalachia. In order to make
the definition easy to implement and operationalize, FHFA will provide
to the Enterprises, and post on FHFA's Web site, a data file that lists
all of the census tracts that are eligible under the final rule's
definition of ``Middle Appalachia.''
b. The Lower Mississippi Delta. Consistent with the proposed rule,
the final rule includes the Lower Mississippi Delta as a high-needs
rural region. There was widespread support from commenters for
including the Lower Mississippi Delta as a high-needs rural region
because of its unique challenges and housing conditions, as with the
other high-needs rural regions identified in the proposed rule. Neither
Enterprise took a position on including the Lower Mississippi Delta as
a high-needs rural region.
The proposed rule discussed generally the Lower Mississippi Delta
Development Act's and former Lower Mississippi Delta Development
Commission's definition of ``Lower Mississippi Delta'' as the counties
and parishes in portions of Arkansas, Louisiana, Mississippi, Missouri,
Illinois, Tennessee, Kentucky, and Alabama. This definition of ``Lower
Mississippi Delta'' was not specifically included in proposed Sec.
1282.1. Commenters did not recommend changes to this definition for
purposes of this Regulatory Activity or request clarification of the
scope of the definition. Fannie Mae requested that FHFA add a specific
definition of ``Lower Mississippi Delta'' in the final rule text.
As with the ``Middle Appalachia'' high-needs rural region, FHFA has
determined that incorporating a specific definition of ``Lower
Mississippi Delta'' in the final rule text can assist the Enterprises
in proposing their activities under the Duty to Serve. The Rural
Development, Agriculture, and Related Agencies Appropriations Act for
FY 1989, Public Law 100-460, included the Lower Mississippi Delta Act,
which authorized the Lower Mississippi Delta Development Commission and
identified counties in the Lower Mississippi Delta. The Consolidated
Appropriations Act of 2001, Public Law 106-554, and the Farm Security
and Rural Investment Act of 2002, Public Law 107-171, added counties to
the definition. Accordingly, Sec. 1282.1 of the final rule defines
``Lower Mississippi Delta'' as the counties identified by these laws,
along with any future updates Congress may make to the definition of
the region. In order to make the definition easy to implement and
operationalize, FHFA will provide to the Enterprises, and post on
FHFA's Web site, a data file that lists all of the census tracts that
are eligible under the final rule's definition of ``Lower Mississippi
Delta.''
c. Colonias. Consistent with the proposed rule, the final rule
includes colonias as high-needs rural regions but revises the
definition of ``colonia'' from that in the proposed rule, as discussed
below. A number of commenters supported including colonias as high-
needs rural regions because of their economic distress and persistent
poverty. Neither Enterprise took a position on including colonias as
high-needs rural regions.
Section 1282.1 of the final rule defines a ``colonia'' as an
identifiable community that meets the definition of a colonia under a
federal, state, tribal, or local program. This is a change from the
proposed rule, which would have defined a ``colonia'' as any
identifiable community that (i) is designated as a colonia by the state
or county in which it is located; (ii) is located in Arizona,
California, New Mexico, or Texas; and (iii) is located in a U.S. census
tract with some portion of the tract being within 150 miles of the
U.S.-Mexico border. FHFA chose this proposed definition in order to
incorporate certain elements of the definition used by the Cranston-
Gonzales National Affordable Housing Act, discussed below, while also
providing a broad scope for Enterprise activities, including the
purchase of mortgage loans, in colonias.
The proposed rule specifically requested comment on how FHFA should
define a ``colonia'' for Duty to Serve purposes. Few commenters made
recommendations on the proposed definition, and no commenters
specifically supported it. Fannie Mae recommended that FHFA modify the
proposed definition to include the entire county in which a colonia is
located, due to the impact that a colonia may have on the economy and
housing needs of the county as a whole. A state housing finance agency
expressed concern about the potential for confusion and operational
difficulties that could arise from the many conflicting definitions of
colonia. The commenter recommended that FHFA define ``colonias'' as the
eligible communities under the commonly used HUD and USDA programs, as
well as any federally established definition used by state and local
programs.
FHFA finds that definitions used by HUD and USDA would pose
challenges under the Duty to Serve because they include a requirement
that to be considered a ``colonia,'' the community must lack a potable
water supply and adequate sewage systems.\93\ As noted in the
SUPPLEMENTARY INFORMATION to the proposed rule, if such requirements
were applied for Duty to Serve purposes, the Enterprises would likely
be able to receive little or no Duty to Serve credit for activities in
colonias because the Enterprises' property eligibility requirements
would not permit them to purchase mortgages on properties that lack
potable water supplies and adequate sewage systems.
---------------------------------------------------------------------------

\93\ The Cranston-Gonzalez National Affordable Housing Act
defines a ``colonia'' as an identifiable community that (A) is in
the State of Arizona, California, New Mexico, or Texas; (B) is in
the area of the United States within 150 miles of the U.S.-Mexico
border (not including any standard MSA with a population exceeding 1
million), or is in the United States-Mexico border region (the
applicable criterion depends on the particular housing program); (C)
is determined to be a colonia on the basis of objective criteria,
including lack of potable water supply, lack of adequate sewage
systems, and lack of decent, safe and sanitary housing; and (D) was
in existence as a colonia before November 28, 1990. See 42 U.S.C.
1479(f)(8); 42 U.S.C. 5306 note. Previous statutory definitions
included the criteria that a state or county in which a community is
located designate a particular community as a ``colonia.'' See
Public Law 101-625, 104 Stat. 4290, 4396 (1990). HUD and USDA
definitions of ``colonia'' rely on previous and current statutory
definitions of ``colonia,'' based on the specific housing program.
See 7 CFR 1777.4; 24 CFR 570.411.
---------------------------------------------------------------------------

In addition, FHFA has determined that the geographic limitation in
HUD and USDA definitions of ``colonia'' that was included in FHFA's
proposed definition could discourage the Enterprises from serving
communities designated as colonias by state, tribal or local programs
that have similar indicia of poverty and needs, but do not meet the
geographic requirement. Both the HUD and USDA definitions require that
to be considered a colonia, the community must be located in an area
within 150 miles of the U.S.-Mexico border. FHFA's proposed definition
of ``colonia'' would have included a requirement that the community be
located in a U.S. census tract with some portion of the tract within
150 miles of the U.S.-Mexico border. FHFA notes that, for example,
several counties in Texas with communities designated as colonias by
the state are not within 150 miles of the U.S.-Mexico border, as the
State of Texas includes a category of ``non-border colonias'' in its
water code. These colonias do not meet the 150-mile requirement, yet
share similar indicia of

[[Page 96276]]

poverty and needs as other colonias in Texas that meet the 150-mile
requirement. The Texas Secretary of State identifies Marion, Newton,
Red River, and Sabine Counties, which are located more than 150 miles
from the Texas-Mexico border, as counties that include colonias.
FHFA notes that in many cases, state and local governments play an
important role in the level of public controls related to factors such
as the initial designation of colonias, their ongoing conditions, and
local initiatives to improve their conditions. Some colonias are
incorporated communities under the control of a city, some are
unincorporated and under the control of a county, and some may be under
the control of both a city and a county if they are located in extra-
jurisdictional territories of a city that shares some level of control
with the county. The motivation to improve conditions for residents of
colonias has led to a variety of projects that combine funding from
multiple federal and non-federal sources.
After considering the comments and the varying definitions of
``colonia,'' FHFA has determined that broadening the proposed
definition of ``colonia'' could encourage Enterprise support for
colonias, as defined by federal, state, tribal, or local programs.
Accordingly, Sec. 1282.1 of the final rule defines a ``colonia'' as an
identifiable community that meets the definition of a colonia under a
federal, state, tribal, or local program. Since FHFA is adopting a
broad definition of ``colonia,'' it will be unable to provide the
Enterprises a data file that lists all of the census tracts that are
eligible under the final rule's definition of ``colonia,'' as it plans
to do for the other high-needs rural regions. To address the data
challenges that exist in specifically identifying the census tracts
that contain ``colonias,'' FHFA encourages the Enterprises to collect
and share granular data with researchers, lenders, and housing
providers.
Enterprise purchases of loans that are made under any HUD or USDA
programs that serve a ``colonia,'' are eligible for Duty to Serve
credit under this Regulatory Activity, provided they are located in a
``rural area'' as defined in the final rule and are for very low-, low,
or moderate-income households as defined under the Duty to Serve.
d. Tracts in Persistent Poverty Counties. Section 1282.1 of the
final rule includes rural tracts that are located in ``persistent
poverty counties,'' and that are not located in Middle Appalachia, the
Lower Mississippi Delta, or colonias, in the definition of ``high-needs
rural regions.'' This is a change from the proposed rule, which would
not have included rural tracts located in persistent poverty counties
in the definition.
The proposed rule specifically requested comment on whether there
are high-needs rural regions or high-needs rural populations in
addition to those identified that should be included and, if so, how
they should be defined in order to receive Duty to Serve credit. A
number of commenters, including several nonprofit organizations and
policy advocacy organizations, pointed out that certain regions similar
in nature to the high-needs rural regions in the proposed rule were
omitted from the proposed rule's definition of ``high-needs rural
region.'' The regions identified by the commenters include: Rural areas
of Puerto Rico; much of mainland Alaska; the central valley of
California; and the region described by commenters as the ``Southern
Black Belt'' in Alabama, Georgia, and the Carolinas. Of these regions,
the one most frequently cited by commenters as a high-needs rural
region was the ``Southern Black Belt.''
The most common recommendation from commenters who supported
changes to the definition of ``high-needs rural region'' was to include
areas struggling with ``persistent poverty'' as high-needs rural
regions, which would capture rural regions struggling with the same
types of challenges as the specific high-needs rural regions identified
in the proposed rule. Commenters supporting this approach included
several nonprofit organizations and policy advocacy organizations.
Some commenters either referenced or recommended a particular
definition for ``persistent poverty'' areas. A nonprofit organization
recommended that FHFA use the definition of ``persistent poverty
county'' used by the U.S. Department of Treasury's CDFI Fund, which
defines a ``persistent poverty county'' as a county that had poverty
rates of 20 percent or more over the past 30 years, as measured by the
1990, 2000, and 2010 decennial censuses. A policy advocacy organization
recommended the same definition without naming the CDFI Fund. Another
policy advocacy organization recommended the definition of ``persistent
poverty county'' used by the USDA Economic Research Service, which
defines a ``persistent poverty county'' as one with poverty rates of 20
percent or more over the past 30 years, as measured by the 1980, 1990,
and 2000 decennial censuses and the 2007-2011 American Community
Survey. Some nonprofit organizations used the USDA Economic Research
Service's definition in describing what a ``persistent poverty county''
means, but did not explicitly recommend that FHFA use that definition.
Several other policy advocacy organizations recommended that FHFA add
persistent poverty counties located in the rural Southeast's ``Black
Belt'' as a fourth high-needs rural region, but they did not propose a
specific definition of ``persistent poverty county.''
FHFA finds compelling the comments that tracts in rural areas that
are located in persistent poverty counties should be included as high-
needs rural regions in the final rule because, as the commenters noted,
this would capture many of the regions which commenters identified as
high-needs that were omitted from the proposed rule's definition of
``high-needs rural region.'' In choosing a measure for persistent
poverty areas, FHFA analyzed both the CDFI Fund definition and the USDA
Economic Research Service definition. The CDFI fund identified 384
counties with persistent poverty under its definition, using data from
the 1990 census, the 2000 census, and the 2006-2010 American Community
Survey.\94\ Under its methodology, the USDA Economic Research Service
identified 353 counties with persistent poverty. FHFA has selected the
CDFI Fund's definition for the final rule because it includes both 31
more counties and 286 additional rural area tracts than the USDA
Economic Research Service definition along with having a greater level
of support from commenters.
---------------------------------------------------------------------------

\94\ Consolidated Appropriations Act, 2012, Public Law 112-74,
125 Stat. 887 (2011).
---------------------------------------------------------------------------

The persistent poverty counties identified by the CDFI Fund capture
regions, such as the ``Southern Black Belt'' and parts of Alaska, that
were omitted from the proposed rule's definition of a ``high-needs
rural region.'' The CDFI Fund definition of ``persistent poverty
counties'' does overlap to a large extent with the other high-needs
rural regions and populations identified in the final rule, such as
Middle Appalachia, the Lower Mississippi Delta, colonias, and Indian
areas. Accordingly, to prevent double-counting for Duty to Serve
purposes, tracts in ``persistent poverty counties'' considered ``high-
needs rural regions'' will be limited to those places that are not
already included in Middle Appalachia, the Lower Mississippi Delta, or
colonias.
The CDFI Fund definition of ``persistent poverty counties'' does
not distinguish between rural poverty

[[Page 96277]]

counties and urban poverty counties. For example, the CDFI Fund
definition includes Kings County, N.Y. and Bronx County, N.Y., located
in New York City, which are not rural by any definition. Since the CDFI
Fund definition is not limited to rural areas, the final rule provides
that the tracts in persistent poverty counties must be located in
``rural areas,'' as defined in the final rule, in order to be
considered ``high-needs rural regions.'' In the 384 counties identified
by the CDFI Fund as persistent poverty counties, FHFA has identified
2,127 tracts that are located in such ``rural areas.''
In short, Sec. 1282.1 of the final rule defines ``high-needs rural
region'' to include a rural tract in a ``persistent poverty county''
that is not located in Middle Appalachia, the Lower Mississippi Delta,
or a colonia. Section 1282.1 defines a ``persistent poverty county'' as
a county that has had 20 percent or more of its population living in
poverty over the past 30 years, as measured by the most recent
successive decennial censuses. For the first Duty to Serve Plan
evaluation cycle, the counties identified by the CDFI Fund as
``persistent poverty counties'' will be used. In order to make the
definition easy to implement and operationalize, FHFA will provide to
the Enterprises, and post on FHFA's Web site, a data file that lists
all of the census tracts that are eligible under the final rule's
definition of ``persistent poverty counties.''
(ii) Housing for High-Needs Rural Populations--Sec. 1282.35(c)(2)
Section 1282.1 of the final rule defines ``high-needs rural
population'' as any of the following populations located in a rural
area: (i) Members of a Federally recognized Indian tribe located in an
Indian area; or (ii) agricultural workers. This definition is the same
as the definition in the proposed rule except that the final rule
includes all agricultural workers instead of only migrant and seasonal
agricultural workers. FHFA chose these specific rural populations for a
Regulatory Activity because they experience a high concentration of
poverty and live in substandard housing conditions. A discussion of
comments on whether Enterprise support for high-needs rural populations
should be a Regulatory Activity is included under the ``high-needs
rural regions'' discussion above.
a. Members of a Federally Recognized Indian Tribe Located in an
Indian Area. Section 1282.1 of the final rule defines ``Federally
recognized Indian tribe'' and ``Indian area'' consistent with the
definitions in the proposed rule. Several nonprofit organizations and
policy advocacy organizations supported providing Duty to Serve credit
for this population because of its unique needs and the historical lack
of mortgage lending that has been available to it.
Both Enterprises proposed an alternative approach that would target
geographical areas as a way to assist this population. The Enterprises
stated that this change would achieve operational efficiencies by
providing Duty to Serve credit for loan purchases in ``Indian areas''
without requiring that a borrower actually be a member of a Federally
recognized Indian tribe. FHFA considered this recommendation, but finds
that the Enterprises' suggested geographical areas would be over-
inclusive and would direct support away from the targeted population.
The Enterprises' suggested changes would potentially drive lending to
areas where it is far less challenging to finance housing and where the
needs of this population are much less severe, such as housing within
the bounds of an Indian area that is titled as fee simple property, or
housing that is not owned by a member of a Federally recognized Indian
tribe. Accordingly, the final rule does not adopt this recommendation.
Loans made under the HUD Section 184 and Title VI programs serve
members of a Federally recognized Indian tribe in Indian areas
consistent with the final rule's definition of this high-needs rural
population. Enterprise purchases of loans that are made through these
programs and that are provided to a Federally recognized Indian tribe
or its members, located in an Indian area, are eligible for Duty to
Serve credit under this Regulatory Activity, provided they are located
in a ``rural area'' as defined in the final rule and are for very low-,
low, or moderate-income households as defined under the Duty to Serve.
b. Agricultural Workers. Section 1282.1 of the final rule also
includes agricultural workers within the definition of ``high-needs
rural population.'' Section 1282.1 defines ``agricultural worker'' to
mean any person that meets the definition of an agricultural worker
under a federal, state, tribal, or local program. This is a change from
the proposed rule, which would have included only migrant and seasonal
agricultural workers, as defined by the U.S. Department of Labor.
The proposed rule specifically requested comment on whether FHFA
should define ``high-needs rural population'' to include other
categories of agricultural workers with high-needs housing issues in
addition to seasonal and migrant agricultural workers, and whether
agricultural workers with permanent annual employment should be
included.
Several policy advocacy organizations and nonprofit organizations
supported including seasonal or migrant workers as a high-needs rural
population due to their significant housing needs, and some expressed
optimism about how the Enterprises could do more to interact with these
communities.
A nonprofit organization recommended that other categories of
migrant workers, such as those employed in commercial agricultural
production centers like saw mills, be included in this high-needs rural
population, but did not provide reasons for expanding the definition.
A state housing finance agency noted that housing finance agencies
and other state, local, and nonprofit organizations currently serve
migrant and seasonal agricultural workers through a variety of federal
programs, and advocated for Enterprise support for successful existing
programs and for the development of new programs for Duty to Serve
credit.
Both Enterprises expressed concerns about limiting the Duty to
Serve rule to seasonal and migrant agricultural workers, and Freddie
Mac specifically recommended that annual farmworkers be considered a
high-needs rural population. Fannie Mae opposed applying the U.S.
Department of Labor's definition of ``migrant and seasonal agricultural
workers,'' citing a potential operational burden that the definition
could impose because: (1) Fannie Mae does not collect the data needed
for the definition, and (2) people may not accurately self-identify as
beneficiaries. Both Enterprises proposed an alternative approach that
would target geographical areas as a way to assist agricultural
workers. Fannie Mae provided a more detailed explanation of this
methodology, suggesting that FHFA consider using USDA data to identify
areas that include a certain threshold percentage of migrant
agricultural workers. FHFA considered this recommendation, but finds
that the Enterprises' suggested geographical areas would be over-
inclusive and would direct support away from the agricultural worker
population.
FHFA has considered the comments and finds the arguments compelling
that the final rule should not be limited to migrant and seasonal
agricultural workers, which would exclude people working on dairy
farms, animal processing plants, or fisheries, as well as those who
work on a farm year-round engaged in activities such as irrigation

[[Page 96278]]

work. FHFA finds no evidence that annual agricultural workers have
lesser housing needs than migrant and seasonal agricultural workers. In
fact, some data shows that agricultural workers as a whole are among
the poorest populations, with families living in poverty at twice the
national rate.
Accordingly, Sec. 1282.1 of the final rule includes agricultural
workers rather than only migrant and seasonal workers as a ``high-needs
rural population.'' Section 1282.1 defines ``agricultural worker'' as
any person that meets the definition of an agricultural worker under a
federal, state, tribal, or local program. FHFA has determined that this
definition of ``agricultural worker'' could include farmworkers who
have significant housing needs but may not migrate or work in seasonal
patterns, and broadens the types of farmworker programs across states,
localities, and tribal jurisdictions that the Enterprises could support
for Duty to Serve credit.
The USDA 514 and 516 programs provide loans or grants for
properties with affordable housing for agricultural workers. Because
the final rule's definition of ``agricultural worker'' allows for use
of the definition of ``agricultural worker'' by another federal
program, such as a USDA program, Enterprise purchases of loans
associated with USDA Section 514 and 516 properties are eligible for
Duty to Serve credit under this Regulatory Activity, provided the
properties are located in a ``rural area'' as defined in the final rule
and support affordable housing for very low-, low, or moderate income
households as defined under the Duty to Serve.
(iii) Financing by Small Financial Institutions of Rural Housing--
Sec. 1282.35(c)(3)
The final rule establishes a new Regulatory Activity for Enterprise
activities related to the financing by small financial institutions of
owner-occupied or multifamily rental housing in rural areas. This is a
change from the proposed rule, which would not have included this as a
Regulatory Activity.
The proposed rule specifically requested comment on what types of
barriers exist to rural lending for housing and how the Enterprises
could best address them. The proposed rule also asked what types of
Enterprise activities could help build institutional capacity and
expertise among market participants serving rural areas. A number of
commenters identified barriers to rural lending and discussed how the
Enterprises could address these challenges. A nonprofit organization
that specializes in rural housing identified bank consolidation as a
barrier to rural lending for housing, citing Home Mortgage Disclosure
Act data showing that nearly 30 percent of all reported rural and small
town home purchase loans were made by just ten banks. Additionally, the
commenter stated that large banks serving communities far from their
headquarters may not be as attached to the communities in comparison to
smaller community banks based in those communities. The commenter
asserted that this has resulted in large banks not fully knowing their
customer base, being less involved in the community, and potentially
making fewer loans in the community.
To help address this issue, the commenter recommended encouraging
the Enterprises to work with community-based lenders in rural areas by
giving Duty to Serve credit for Enterprise purchases of rural mortgage
loans generated by small bank lenders. The commenter recommended
defining ``small bank lenders'' using the Community Reinvestment Act's
(CRA) classification of small financial institutions under the CRA
threshold for ``intermediate small institutions,'' which is currently
$304 million in assets.\95\
---------------------------------------------------------------------------

\95\ See 80 FR 81162 (Dec. 29, 2015) (as adjusted annually for
inflation).
---------------------------------------------------------------------------

Identifying a different concern, a state-based rural advocacy
organization suggested that small financial institutions in rural areas
may lack the experience necessary to address rural lending challenges.
The commenter stated that the Enterprises can help address these
capacity shortcomings by providing technical and product-related
support to small lenders. A state housing finance agency commented that
current Enterprise requirements for small financial institutions to
become seller/servicers can be onerous and expensive. A nonprofit
organization specializing in rural housing development commented that
small financial institutions, particularly CDFIs, have been focused on
serving rural areas for many years and are well positioned to work with
the Enterprises to help address barriers to rural lending.
FHFA finds the comments compelling that the rural market would
benefit from adding a Regulatory Activity in the final rule that
specifically encourages Enterprise activities related to lending in
rural areas by small financial institutions. This is an area where the
Enterprises have the capacity to make an immediate difference by
providing technical assistance and working with small financial
institutions to help them become approved seller/servicers.
Consolidation of the financial services industry has hit rural
areas particularly hard. The number of banks headquartered in farm-
dependent rural areas declined from about 1,500 in 1995 to less than
600 in 2015.\96\ Overall, the number of banks with less than $1 billion
in assets has decreased dramatically over the last 30 years. In 1985,
there were 17,467 FDIC-insured institutions with less than $1 billion
in assets; by 2010, this number had declined to 6,992.\97\ With
mergers, consolidations, and acquisitions dramatically reducing the
number of community banks,\98\ opportunities for the Enterprises to
support affordable housing through small financial institutions have
diminished.
---------------------------------------------------------------------------

\96\ Julie Stackhouse, Federal Reserve Bank of St. Louis,
Presentation at the Federal Reserve Board Conference, ``The Future
of Rural Communities: Implication for Housing'' (May 10, 2016).
\97\ FDIC Community Banking Research Project, ``Community
Banking by the Numbers--Federal Deposit Insurance Corporation,'' p.
3 (February 16, 2012) (PowerPoint Presentation), available at
https://www.fdic.gov/news/conferences/communitybanking/community_banking_by_the_numbers_clean.pdf>.
\98\ Federal Deposit Insurance Corporation, ``Community Banking
Study'' (December 2012), available athttps://www.fdic.gov/regulations/resources/cbi/report/cbi-full.pdf.
---------------------------------------------------------------------------

FHFA considered the definitions of small financial institutions/
community banks from the CRA, CFPB, FRB, and OCC, and found that there
are no operational impediments that would make any of those definitions
impractical for the Enterprises. The Enterprises currently have a
variety of programs, such as the cash window delivery process, that
make it possible for even very small lenders to engage in business with
the Enterprises, as long as they meet the Enterprises' minimum net
worth requirements.
FHFA analyzed the rationales for the CRA, CFPB, FRB, and OCC
definitions, and finds that the purpose of the CRA definition aligns
most closely with FHFA's policy goal for including support for small
financial institutions in the final rule. Under the CRA, a small bank
is defined as a financial institution with assets of less than $1.216
billion. A small bank becomes an ``intermediate small bank'' when it
has assets of at least $304 million and less than $1.216 billion.\99\
Small lenders play an important role in providing affordable housing,
but face certain operational

[[Page 96279]]

challenges that put them at a disadvantage in relation to larger
financial institutions. Because the asset size of small financial
institutions is a barrier to lending in the rural market and there are
limited opportunities for the Enterprises to more robustly engage these
institutions, especially those with less than $304 million in assets,
FHFA finds that the CRA definition of small banks below the
``intermediate small bank'' threshold can serve as a reasonable asset
cap to define ``small financial institution.''
---------------------------------------------------------------------------

\99\ Board of Governors of the Federal Reserve System,
``Agencies Release Annual CRA Asset-Size Threshold Adjustments for
Small and Intermediate Small Institutions,'' Press release, December
22, 2015, available athttp://www.federalreserve.gov/newsevents/press/bcreg/20151222a.htm.
---------------------------------------------------------------------------

Accordingly, Sec. 1282.35(c)(3) of the final rule establishes a
Regulatory Activity for Enterprise activities related to financing by
small financial institutions of housing in rural areas. Section 1282.1
defines ``small financial institution'' consistent with CRA's
classification of small banks below the threshold for ``intermediate
small banks'' (i.e., those financial institutions with less than $304
million in assets).
Enterprise purchases of loans made by small financial institutions
and that support housing under the USDA Section 502, 504, 514, 515,
516, and 538 programs would be eligible for Duty to Serve credit under
this Regulatory Activity, provided the housing is located in a ``rural
area'' as defined in the final rule, and serves very low-, low, or
moderate-income families as defined under the Duty to Serve. The
Enterprises may consider working with aggregators that facilitate such
lending from small financial institutions in rural areas for Duty to
Serve credit.
(iv) Small Multifamily Rental Properties in Rural Areas--Sec.
1282.35(c)(4)
Section 1282.35(c)(4) of the final rule establishes a new
Regulatory Activity for Enterprise support for financing of small
multifamily rental properties in rural areas. Section 1282.1 defines
``small multifamily rental property'' as a property with 5 to 50 rental
units. This Regulatory Activity was not included in the proposed rule.
The proposed rule specifically requested comment on what types of
barriers exist to rural lending for housing and how the Enterprises can
best address them. The proposed rule also asked what types of
Enterprise activities could help build institutional capacity and
expertise among market participants serving rural areas. A number of
commenters identified barriers to rural lending and discussed what the
Enterprises could do about these challenges. One nonprofit organization
that specializes in rural housing responded that there is a great need
for financing to preserve rural small multifamily properties. The
commenter and a policy advocacy organization stated that multifamily
properties in rural areas tend to be small. The commenter noted that
there are very few multifamily properties with more than 30 units and
that two of the largest rural multifamily financing programs, the USDA
Section 514 and 515 programs, average just 30 units per project. Given
the smaller scale of these properties, developers may encounter
challenges with transaction and operational costs, which can be spread
across large properties in a more cost-effective way. A rural housing
trade association labelled the challenges of refinancing Section 515
small multifamily properties a crisis, and identified data showing that
a significant share of Section 515 multifamily units will be paid off
by 2024 and will require refinancing to maintain their
affordability.\100\
---------------------------------------------------------------------------

\100\ FHFA recognizes that new data was recently released by the
USDA suggesting that the spike in maturing Section 515 mortgages may
be later than was anticipated when this comment letter was
submitted. The latest data released by USDA on this topic is at:
http://www.sc.egov.usda.gov/data/data_files.html.
---------------------------------------------------------------------------

Financing of small multifamily housing faces unique challenges
compared to financing of larger multifamily developments. Many
properties in the unsubsidized small multifamily market suffer from
deferred maintenance, energy inefficiency, and faulty plumbing, which
make it difficult for the rents to cover operating costs.\101\
Financial institutions and developers may be reluctant to finance rural
housing if they believe their revenues will not cover costs. Data from
the Residential Finance Survey indicate that in 2001, 12 percent of
low-cost rental properties with average monthly rents of $400 or less
reported negative net operating income, an unsustainable condition that
could lead to accelerating losses of these units in the future.\102\
Almost two-thirds of the nation's nearly 26 million unsubsidized rental
units were owned by individuals or couples in 2001.\103\ Small-scale
multifamily properties often are not well-capitalized, and their owners
may struggle with the costs and processes that are critical when
managing tenants and properties.\104\
---------------------------------------------------------------------------

\101\ William Apgar & Shekar Narasimhan, Joint Center for
Housing Studies, ``Enhancing Access to Capital for Smaller
Unsubsidized Multifamily Rental Properties,'' p. 6 (RR07-8) (Harvard
University, March 2007), available at http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/rr07-8_apgar.pdf.
\102\ Id. at 11.
\103\ Id. at 13.
\104\ Id. at 11, 15.
---------------------------------------------------------------------------

FHFA is persuaded by the comments and its research that rural
markets could benefit from adding a Regulatory Activity in the final
rule that specifically encourages Enterprise support for financing of
small multifamily rental properties in rural areas, including
Enterprise technical assistance to rural lenders for such properties.
Due to the significant need for small multifamily rental housing in
rural areas, the Regulatory Activity is not limited to support for
rural lenders of a specific size, as under the Regulatory Activity in
Sec. 1282.34(d)(1) for small multifamily rental properties under the
affordable housing preservation market. An Enterprise purchase of a
loan on small multifamily rental housing in a rural area is eligible
for Duty to Serve credit under both the affordable housing preservation
market and the rural market, provided the activity complies with both
Sec. Sec. 1282.34(d)(1) and 1282.35(c)(4).
Examples of channels that the Enterprises could use to help address
the need for financing of small multifamily rental housing in rural
areas include: (1) Purchasing loans that support properties financed
through the USDA Section 514, 515, and 538 programs; (2) purchasing
loans originated under the HUD Small Building Risk Sharing Initiative;
(3) purchasing loans originated under the USDA 538 program; and (4)
providing technical assistance to lenders serving rural areas, as long
as the housing being supported through the Enterprises' activities is
located in a ``rural area'' as defined in the final rule, and serves
very low-, low-, or moderate-income households as defined under the
Duty to Serve.
(v) Low-Income Housing Tax Credit Equity Investments--Sec.
1282.37(b)(5)
The Safety and Soundness Act requires FHFA to consider the amount
of an Enterprise's investments and grants in projects that assist in
meeting the needs of the underserved markets in evaluating the
Enterprise's Duty to Serve performance.\105\ Low-Income Housing Tax
Credit (LIHTC) equity investments by the Enterprises would fall within
this investments category but FHFA, to date, has not permitted the
Enterprises to make LIHTC equity investments during their
conservatorships.
---------------------------------------------------------------------------

\105\ See 12 U.S.C. 4565(d)(2)(D).
---------------------------------------------------------------------------

The proposed rule did not include any specific provisions on
Enterprise LIHTC equity investments, but requested comment on a number
of related issues. Numerous commenters provided responses to FHFA's
questions, with the views expressed

[[Page 96280]]

generally falling into three broad categories: (i) Duty to Serve credit
should be permitted only for targeted or limited Enterprise LIHTC
equity investments; (ii) Duty to Serve credit should be permitted for
Enterprise LIHTC equity investments with few or no restrictions; and
(iii) FHFA should maintain its prohibition on all LIHTC-related
activities by the Enterprises.
After considering the comments, under Sec. 1282.37(b)(5) of the
final rule, Enterprise LIHTC equity investments will be eligible for
Duty to Serve credit in rural areas only. FHFA will consider the extent
to which an Enterprise's LIHTC equity investments serve high-needs
rural regions and populations during the evaluation process and may
provide greater Duty to Serve credit for such investments. Any
Enterprise LIHTC equity investments are conditioned on receiving a
separate approval of the investments by FHFA as conservator. The
comments received and the final rule provision concerning LIHTC equity
investments are discussed below.
A majority of the commenters, consisting primarily of nonprofit
organizations and policy advocacy organizations, fell into the first
group, favoring providing Duty to Serve credit only for targeted or
limited Enterprise re-entry into the LIHTC equity investment market.
Many of these commenters favored targeting any LIHTC equity investments
made by the Enterprises to certain geographic areas or limited by other
specific criteria, with some commenters favoring volume caps. Several
policy advocacy organizations, a nonprofit organization, and a banking
trade association recommended that if the Enterprises are allowed to
re-enter the LIHTC equity investment market, FHFA should require
targeting of the investments to underserved areas where Enterprise
support is most needed, including rural markets and high-needs rural
regions such as Indian Country. A nonprofit organization commented that
Enterprise LIHTC equity investment in rural areas is needed because
rural projects cannot offer the economies of scale or the profit
potential needed to attract financing or LIHTC equity investment from
large commercial lenders. A nonprofit intermediary favored Duty to
Serve credit for LIHTC equity investments in properties assisted under
the statutorily-enumerated affordable housing preservation programs and
in rural areas with persistent poverty. Commenters stated that
restricting the Enterprises to LIHTC equity investments in limited
areas would prevent the distortion of LIHTC equity prices and the
pricing out of private investors, while giving the Enterprises
flexibility to respond to underserved market needs.
Among this first group, a housing advocacy organization recommended
providing Duty to Serve credit based on the condition and long-term
affordability of the project at the end of the LIHTC compliance period,
rather than by geographic targeting. A nonprofit organization involved
in lending, developing, and managing affordable properties highlighted
several specific markets needing LIHTC equity investment: (1) Long-term
Section 8 properties; (2) 4 percent LIHTC preservation projects; (3)
rural housing; (4) Native American housing; (5) assisted living housing
for low-income elderly households; and (6) supportive housing with
intensive supportive services.
The second group of commenters, including both Enterprises, a trade
organization, and a nonprofit housing developer, preferred that Duty to
Serve credit be available for Enterprise LIHTC equity investments with
few or no restrictions. The commenters stated that there is an ongoing
need for unrestricted Enterprise support, especially for projects
outside of major banks' Community Reinvestment Act (CRA) assessment
areas. Fannie Mae and a private nonprofit investor and lender
specializing in financing affordable housing and community development
specifically objected to limiting Enterprise LIHTC equity investments
to pre-determined geographic areas, arguing that this would preclude
the Enterprises from investing in multi-investor funds.
Commenters in this group also recommended that the Enterprises be
positioned to serve as ``investors of last resort'' should the LIHTC
equity market soften. They stated that in order to be able to respond
quickly and effectively to changing market conditions, the Enterprises
must have organizational structures and staff in place with expertise
in LIHTC equity investments.
A smaller third group of commenters, which included a banking trade
association, an organization for LIHTC investors, and several housing
advocacy organizations, favored prohibiting all LIHTC-related
activities by the Enterprises. Their general view was that the demand
for LIHTCs is extremely high and that Enterprise re-entry into the
LIHTC equity investment market would drive prices higher, drive private
investors out of the market, and obstruct banks' CRA compliance. A
nonprofit housing organization stated that Enterprise LIHTC equity
investments should not be allowed because the Treasury Department
sweeps the Enterprises' profits.
After considering the comments, FHFA is persuaded that despite a
vibrant LIHTC equity investment market in some areas of the country,
other limited areas have significant LIHTC equity needs that the
Enterprises could safely assist. The financial crisis did not affect
all regions of the country equally. Certain parts of the country,
including cities such as New York and San Francisco, have avoided the
sharp decrease in LIHTC demand and prices, and affordable housing
construction in these areas has continued on pace. In fact, the demand
for LIHTC equity investments in affluent urban markets has escalated,
with prices reaching as high as $1.17 per $1.00 of LIHTCs. It would not
currently serve the purposes of the Duty to Serve for the Enterprises
to re-enter these markets because the Enterprises could displace
private investors, as pointed out by some commenters.
Other areas of the country, notably certain rural regions, have
seen the demand for LIHTC equity investments disappear, with fewer
LIHTC projects being completed during and following the financial
crisis. A 2014 report found that the proportion of LIHTC-financed
housing units developed in rural communities fell by 69 percent between
1987 and 2010.\106\ More specifically, in 1987, 24 percent of all
LIHTC-financed housing was developed in rural areas,\107\ but in 2010,
this percentage had dropped to 7.5 percent.\108\ The report determined
that this decline resulted in large part from a 97 percent reduction in
funding for the Section 515 Rural Rental Housing Loan program, which
many LIHTC projects had used to keep rents low enough to serve the most
vulnerable populations in rural areas.\109\ This has had a material
impact as the absence of LIHTC funding has translated into less money
being available for projects serving very low-, low-, and moderate-
income families in certain areas, primarily rural areas.
---------------------------------------------------------------------------

\106\ See National Rural Housing Coalition, ``Rural America's
Rental Housing Crisis--Federal Strategies to Preserve Access to
Affordable Rental Housing in Rural Communities,'' 17-18 (2014)
[hereinafter cited ``Coalition Study''], available at http://ruralhousingcoalition.org/wp-content/uploads/2014/07/NRHC-Rural-America-Rental-Housing-Crisis_FINALV3.compressed.pdf.
\107\ See Coalition Study, 17.
\108\ See id.
\109\ See Coalition Study, 16-17.
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After considering the comments and available data, FHFA has
determined that, under the final rule, Enterprise LIHTC equity
investments in rural areas will be eligible for Duty to Serve credit,

[[Page 96281]]

subject to approval of such investments by FHFA as conservator. In
addition, for the reasons discussed below, FHFA has determined that it
may provide greater Duty to Serve credit for LIHTC equity investments
that support properties located in high-needs rural areas or that serve
high-needs rural populations. While the final rule does not designate
Enterprise LIHTC equity investments as a stand-alone Regulatory
Activity, an Enterprise Plan could have LIHTC equity investment as an
objective within a Regulatory Activity or within an Additional Activity
for the rural market. For example, an Enterprise could include LIHTC
equity investment in a small Section 515 project as an objective under
the Regulatory Activity for supporting small multifamily properties in
rural areas.
FHFA considered limiting Duty to Serve credit to Enterprise LIHTC
equity investments in rural areas outside of CRA assessment areas but
determined that this was not operationally feasible, despite the needs
of these areas. One study found that LIHTC projects in non-CRA
assessment areas garnered between $0.10 and $0.24 less per $1.00 in
LIHTCs than projects in CRA assessment areas.\110\ In fact, some non-
CRA projects received as much as $0.35 less per LIHTC project.\111\
Lower pricing means less equity and a higher debt burden for projects,
which makes them less affordable to low- and moderate-income
tenants.\112\
---------------------------------------------------------------------------

\110\ CohnReznick, ``The Community Reinvestment Act and Its
Effect on Housing Tax Credit Pricing,'' pp. 7-8, 45 (2013),
available at https://www.cohnreznick.com/sites/default/files/CohnReznick_CRAStudy.pdf.
\111\ Id. at 45.
\112\ See generally Patrick Barbolla, ``Prepared Testimony for a
Hearing on the Low-Income Housing Tax Credit in front of the U.S.
Senate Banking, Housing and Urban Affairs Committee's Subcommittee
on Housing and Transportation'' (May 12, 1999), available at http://www.banking.senate.gov/99_05hrg/051299/barbolla.htm.
---------------------------------------------------------------------------

These pricing disparities may be affected by incentives that banks
have under the CRA. CRA ratings are principally driven by the location
of banks' deposits, with the result that the largest, most densely
populated cities and money centers attract the most CRA investment from
the largest banks.\113\ At the same time, community banks face less
encompassing CRA oversight than large banks and, therefore, generally
lack the same CRA incentives to invest in LIHTC projects.\114\
Community banks also have simpler means available to comply with their
CRA requirements than investing in LIHTC projects.\115\
---------------------------------------------------------------------------

\113\ CohnReznick, ``The Community Reinvestment Act and Its
Effect on Housing Tax Credit Pricing,'' p. 17 (2013), available at
https://www.cohnreznick.com/sites/default/files/CohnReznick_CRAStudy.pdf. In addition, federal regulations specify
that assessment areas may not extend substantially beyond a
metropolitan statistical area boundary. See 12 CFR 25.41(e)(4). See
generally Joint Center for Housing Studies of Harvard University,
``The Disruption of the Low-Income Housing Tax Credit Program:
Causes, Consequences, Responses, and Proposed Correctives,'' pp. 4-5
(Dec. 2009), available at http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/disruption_of_the_lihtc_program_2009_0.pdf;
Buzz Roberts, ``Modifying CRA to Attract LIHTC Investments,'' 13
(Federal Reserve Bank of St. Louis, CAO 925 11/09) [hereinafter
cited ``Roberts Article''], available at https://www.stlouisfed.org/
~/media/Files/PDFs/Community%20Development/LIHTC.pdf.
\114\ See generally 12 CFR part 228, subpart B, available at
http://www.ecfr.gov/cgi-bin/text-idx?SID=f07982420e6efaeb841c66f8580b323e&mc=true&node=pt12.3.228&rgn=div5#se12.3.228_121. National Community Reinvestment Coalition, ``A
Brief Description of CRA,'' available at http://www.ncrc.org/programs-a-services-mainmenu-109/policy-and-legislation-mainmenu-110/the-community-reinvestment-act-mainmenu-80/a-brief-description-of-cra-mainmenu-136. A bank unfamiliar with LIHTCs usually requires
6 to 12 months to make an LIHTC equity investment decision after a
CRA-relevant project receives an LIHTC allocation. Roberts Article,
p. 14.
\115\ National Community Reinvestment Coalition, ``A Brief
Description of CRA,'' available at http://www.ncrc.org/programs-a-services-mainmenu-109/policy-and-legislation-mainmenu-110/the-community-reinvestment-act-mainmenu-80/a-brief-description-of-cra-mainmenu-136. Smaller community banks also face minimum investment
requirements for multi-investor funds, which often start at around
$1 million per investor. See generally Roberts Article, p. 14.
Direct investment minimums can be even higher. See id.
---------------------------------------------------------------------------

While targeting Duty to Serve assistance to areas outside of CRA
assessment areas could be an effective approach in theory, this would
be operationally difficult and burdensome in practice. The federal
banking regulators responsible for CRA compliance (FDIC, FRB, and OCC)
permit each bank to define its own CRA assessment area according to a
set of guidelines, and the banks' lists of CRA assessment areas are not
readily publicly available. In addition, the banks' CRA assessment
areas may fluctuate on a yearly basis.\116\ FHFA has determined that it
would be impractical for the Enterprises to maintain locale-by-locale
information on banks' individual CRA assessment areas. No commenter
identified a method for consistently defining and identifying non-CRA
assessment areas.\117\
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\116\ See generally Kenneth Benton & Donna Harris,
``Understanding the Community Reinvestment Act's Assessment Area
Requirements,'' Consumer Compliance Outlook (First Qtr. 2014),
available at https://consumercomplianceoutlook.org/2014/first-quarter/understanding-cras-assessment-area-requirements/.
\117\ The CohnReznick study referred to previously that
discussed the effects of CRA on LIHTC pricing was not based upon a
comprehensive listing of geographies not covered by CRA assessment
areas, but instead relied on data for only 20 of the largest banks,
and then used branch locations to proxy for assessment areas. See
CohnReznick, ``The Community Reinvestment Act and Its Effect on
Housing Tax Credit Pricing,'' p. 21 (2013), available at https://www.cohnreznick.com/sites/default/files/CohnReznick_CRAStudy.pdf.
---------------------------------------------------------------------------

High-needs rural regions largely overlap with areas outside of the
banks' CRA assessment areas,\118\ and FHFA considered limiting Duty to
Serve credit for Enterprise LIHTC equity investments to high-needs
rural regions and populations. Several nonprofit organizations and
policy advocacy organizations advised that Middle Appalachia, the Lower
Mississippi Delta, colonias, and persistent poverty counties all share
high incidences of poverty and housing problems, and likewise that
Native Americans on Tribal Lands and agricultural workers experience a
disproportionate amount of inadequate housing. A nonprofit organization
stated that projects in these specific high-needs rural regions lie in
``lending deserts'' and face significant hurdles in acquiring the
equity needed to finance affordable housing.\119\ A policy advocacy
organization and a nonprofit organization specializing in rural markets
recommended that all Enterprise LIHTC investments be limited to high-
needs rural regions and populations.
---------------------------------------------------------------------------

\118\ See generally Housing Assistance Council, ``The Community
Reinvestment Act and Mortgage Lending in Rural Communities,'' pp.
25-26 (Jan. 2015), available at http://www.ruralhome.org/storage/documents/publications/rrreports/rrr-cra-in-rural-america.pdf);
Charles Wehrwein, NeighborWorks America, ``Community Reinvestment
Act: Interagency Questions and Answers Regarding Community
Reinvestment'' p. 1 (Nov. 3, 2014) (comment letter), available at
http://www.neighborworks.org/Documents/AboutUs_Docs/PublicPolicy_Docs/CommentLetters_Docs/NeighborWorks-America-Comment-Letter-Community-Rei.aspx.
\119\ See Charles Wehrwein, NeighborWorks America, ``Community
Reinvestment Act: Interagency Questions and Answers Regarding
Community Reinvestment'' p. 1 (Nov. 3, 2014) (comment letter),
available at http://www.neighborworks.org/Documents/AboutUs_Docs/PublicPolicy_Docs/CommentLetters_Docs/NeighborWorks-America-Comment-Letter-Community-Rei.aspx.
---------------------------------------------------------------------------

After considering the comments and needs in the overall rural
market, FHFA is striking a balance by making LIHTC equity investments
in all rural areas eligible for Duty to Serve credit under the final
rule, and by indicating that FHFA may choose to provide greater Duty to
Serve credit for LIHTC equity investments in high-needs rural areas or
that serve high-needs rural populations in the Evaluation Guidance.
FHFA acknowledges that serving rural areas through LIHTC equity
investments--and high-needs rural regions and populations in
particular--will present considerable challenges. High-needs

[[Page 96282]]

rural regions and populations not only have significant needs, but also
face greater barriers to investment, even compared to other rural
regions. For instance, according to comments from Fannie Mae and a
private nonprofit investor and lender, multi-investor funds are
typically structured to include a cross-section of properties, and
investors in these funds generally lack control over the selection of
the underlying projects. Instead, they rely on general underwriting and
investment criteria to control risk. In response to Enterprise demand
for LIHTC equity investments in these rural markets, however,
syndicators could develop multi-investor funds targeting rural regions,
including funds targeting high-needs rural regions and populations. The
intent of the Duty to Serve rule is to create incentives for the
Enterprises to engage in eligible transactions, and by limiting the
Enterprises' eligible LIHTC equity investments, FHFA intends to drive
Enterprise innovation in rural markets.
FHFA also considered the safety and soundness of LIHTC equity
investments in rural areas, including in high-needs rural regions and
populations, and found that they would not expose the Enterprises to
inappropriate risk, as some commenters suggested. Historically,
foreclosure rates on LIHTC properties have fallen below 1 percent,\120\
and few LIHTCs are recaptured.\121\ In addition, Fannie Mae advised
that while non-CRA LIHTC projects and those in challenging submarkets
are often viewed as more risky to investors, they typically perform as
well as conventional LIHTC projects and are consistent with the
Enterprises' conservative risk management structures. Historic returns
on investments and loans in LIHTC projects have been competitive with
similar alternative investment opportunities.\122\
---------------------------------------------------------------------------

\120\ See CohnReznick, ``The Low-Income Housing Tax Credit at
Year 30: Recent Investment Performance (2013-2014),'' pp. 228-229
(Dec. 2015), available at https://www.cohnreznick.com/sites/default/files/pdfs/CR_LIHTC_DEC2015.pdf.
\121\ See Letter of US Bank to OCC, Federal Reserve & Security
and Exchanged Commission, p. 3 (Feb. 10, 2012), available at https://www.sec.gov/comments/s7-41-11/s74111-195.pdf.
\122\ Office of the Comptroller of the Currency, Community
Affairs Department, ``Low-Income Housing Tax Credits: Affordable
Housing Investment Opportunities for Banks,'' Community Development
Insights, p. 7 (Mar. 2014), available at http://www.occ.gov/topics/community-affairs/publications/insights/insights-low-income-housing-tax-credits.pdf.
---------------------------------------------------------------------------

III. Evaluations, Ratings, and Evaluation Guidance--Sec. 1282.36

Under the Safety and Soundness Act, FHFA is required to conduct an
annual evaluation of the Enterprises' activities to fulfill their Duty
to Serve obligations and to assign an annual rating for their
performance under each of the underserved markets.\123\ The final rule
establishes a framework for the evaluation and ratings process that
FHFA will use to assess each Enterprise's Duty to Serve performance
based on the Enterprise's implementation of its Plan during the
relevant evaluation year. As part of this process, FHFA will publish
its annual Duty to Serve evaluation and rating for each Enterprise,
which will provide the public with a transparent description of the
Enterprises' performance and FHFA's assessment of that performance.
---------------------------------------------------------------------------

\123\ See 12 U.S.C. 4565(d)(1), (2).
---------------------------------------------------------------------------

After considering the comments received and further consideration
of the evaluation and ratings process in the proposed rule, the final
rule makes a number of significant changes to the proposed evaluation
and ratings process. The final rule modifies the proposed process for
evaluating Enterprise performance to use a three-step process as
follows: (1) A quantitative assessment; (2) a qualitative assessment;
and (3) an assessment of any extra credit-eligible activities,
including residential economic diversity activities, for extra Duty to
Serve credit. Each of these steps will assess the Enterprise's
accomplishment of the objectives for the activities under each
underserved market in its Plan. As part of the qualitative assessment,
FHFA's evaluation will incorporate an assessment of each Enterprise's
performance of its Plan objectives under one the following four
evaluation areas--outreach, loan product, loan purchase, and
investments and grants--as required by the statute.
At the end of each evaluation year, based on this three-step
process, FHFA will assign one of the following five ratings for each
underserved market in a Plan: Exceeds, High Satisfactory, Low
Satisfactory, Minimally Passing, or Fails. This is a change from the
four-level rating scale in the proposed rule. A rating of Exceeds, High
Satisfactory, Low Satisfactory, or Minimally Passing will constitute
compliance with the Duty to Serve each underserved market. A rating of
Fails will constitute noncompliance with the Duty to Serve the
underserved market. The final rule also provides that on an ongoing
basis FHFA will make such determinations as appropriate based on
evaluation of the program's parameters and operation, pursuant to the
Evaluation Guidance, regarding implementation of the evaluation and
rating process.
As in the proposed rule, FHFA will prepare Evaluation Guidance for
the Enterprises. However, the final rule adjusts the nature of the
Evaluation Guidance to better fit the three-step evaluation process,
which is further described below. FHFA will prepare one Evaluation
Guidance to be used by both Enterprises for their three-year Plans. The
Evaluation Guidance will provide additional guidance on the Plans, how
FHFA will conduct the quantitative, qualitative, and extra credit
assessments, how final ratings will be determined, and other matters as
appropriate. FHFA will provide the Enterprises with proposed Evaluation
Guidance for the first Plan within 30 days after the posting of this
final rule on FHFA's Web site. The proposed Evaluation Guidance will
also be posted to FHFA's Web site, and the public will have 120 days to
provide input on the proposed Evaluation Guidance after its posting on
the Web site. For the first Plan, FHFA will publish the final
Evaluation Guidance no later than the time FHFA delivers comments to
each Enterprise on its proposed Plan. FHFA may modify the Evaluation
Guidance prior to or during the course of the three-year period for the
Evaluation Guidance, and the modified Evaluation Guidance will be
effective for the following Plan year.
The section below describes the final rule provisions for the
evaluation process and ratings applicable to each Enterprise's Duty to
Serve performance. These provisions are presented under subsections
for: (a) Evaluation process; (b) Determination of overall rating and
compliance; and (c) Evaluation Guidance.

A. Evaluation Process

Consistent with the proposed rule, Sec. 1282.36(b) of the final
rule provides that FHFA will evaluate an Enterprise's performance of
its Plan objectives, as designated by the Enterprise in its Plan
pursuant to Sec. 1282.32(f), under one of the following four
evaluation areas: Outreach; loan product; loan purchase; and
investments and grants. These four evaluation areas, and the comments
received, are discussed above under Sec. 1282.32, which addresses the
Underserved Markets Plans.
Additionally, FHFA made substantive changes to the proposed
evaluation process set forth in Sec. 1282.36(c). The final rule
authorizes FHFA to evaluate Enterprise performance using a three-

[[Page 96283]]

step process: (1) A quantitative assessment; (2) a qualitative
assessment; and (3) an assessment of extra credit-eligible activities,
including residential economic diversity activities.
[GRAPHIC] [TIFF OMITTED] TR29DE16.020

This evaluation process is a change from the approach in the
proposed rule, which would have established a scoring framework
allocating points that the Enterprises could earn for specific Duty to
Serve activities performed under their Plans. FHFA would have allocated
100 potential scoring points that an Enterprise could potentially earn
in each underserved market, with extra credit for residential economic
diversity activities as long as the score for the market did not exceed
100 points.
Although a few trade associations and policy advocacy organizations
appreciated the transparency of the proposed approach, the majority of
commenters--including several policy advocacy organizations, nonprofit
organizations, governmental entities, trade associations, and both
Enterprises--found the proposed process and scoring framework highly
prescriptive and overly complex.
Fannie Mae commented that managing to the proposed point system
might create an incentive for the Enterprises to take actions that
optimize scores rather than responding to the needs and opportunities
in the underserved markets. Among its suggested improvements, Fannie
Mae recommended that FHFA consider adapting FHFA's annual Enterprise
conservatorship scorecard approach for the Duty to Serve evaluation
process. Freddie Mac stated that the evaluation and rating process
should not be mechanical or based on rigid criteria. Referencing the
Community Reinvestment Act evaluation framework, Freddie Mac suggested
FHFA consider permitting ``substantial compliance'' with its objectives
as sufficient to be considered in compliance with the Duty to Serve.
Commenters made numerous suggestions for the evaluation process,
many of which FHFA has determined to adopt in the final rule. These
suggestions included: Simplifying the numeric scoring; more closely
aligning the evaluation with the objectives detailed in the Plans;
clarifying the criteria used to assess Enterprise performance;
improving how the evaluation process captures objectives that may not
be inherently numeric or yield results in the short-term; modifying the
scoring framework to encourage the Enterprises to undertake more
challenging activities; and adding flexibility in the evaluation
process to accommodate shifts in the market, innovation, and the degree
to which the Enterprises are responsive to underserved market needs.
Section 1282.36(c) of the final rule specifies that the evaluation
process will comprise a three-step process. The first step will
evaluate the level of accomplishment of the objectives in each
underserved market in an Enterprise's Plan (quantitative assessment).
The second step will evaluate how well the Enterprise performed the
objectives and their impact (qualitative assessment). The third step
will evaluate each Enterprise's achievement of any extra credit-
eligible activities, based on the qualitative assessment factors, for
which the Enterprise could receive Duty to Serve extra credit.
In the quantitative assessment, FHFA will evaluate the level of an
Enterprise's accomplishment of each objective in an underserved market
in its Plan. In the Evaluation Guidance, FHFA will provide the method
and level of accomplishment needed for the objectives to receive a
passing rating for compliance with the Duty to Serve an underserved
market in a Plan. At the conclusion of the quantitative assessment for
an underserved market in a Plan, FHFA will determine whether the
Enterprise receives one of the passing ratings, or a rating of Fails.
In the qualitative assessment, FHFA will evaluate the Enterprise's
accomplishment of each objective for each activity in an underserved
market in its Plan, based on the method and criteria that FHFA will
establish in the Evaluation Guidance, such as how skillfully an
objective was implemented, the impact of the objective, and such other
criteria as FHFA may set forth in the Evaluation Guidance.
Based on the outcome of the quantitative and qualitative
assessments, FHFA will assign a rating for the Enterprise's performance
for each underserved market. If an Enterprise's rating is not changed
due to the awarding of extra credit as described below, this rating
will be the final rating for the Enterprise's performance for an
underserved market in its Plan. The Evaluation Guidance will describe
how the ratings are determined.
In the third step of the evaluation process, FHFA will assess the
Enterprise's performance of any extra credit-eligible activities,
including residential economic diversity activities and objectives that
have been included in the Enterprise's Plan. The assessment will be
based on the method and criteria that FHFA will establish in the
Evaluation Guidance, such as how skillfully the Enterprise implemented
the objective, the impact of the objective, and such other criteria as
FHFA may set forth in the Evaluation Guidance. Depending upon the
outcome of FHFA's assessment, extra credit

[[Page 96284]]

could increase an Enterprise's rating. Rating levels are described in
detail below. Since an Enterprise cannot receive a rating higher than
Exceeds, extra credit cannot increase an Exceeds rating. Nevertheless,
FHFA will recognize these achievements of the Enterprise in FHFA's
written evaluation of the Enterprise's performance for the year. Extra
credit may not be awarded where an Enterprise has received a rating of
Fails for an underserved market in a Plan. Residential economic
diversity activities are further discussed below in Section IV.

B. Determination of Overall Rating and Compliance

At the end of the evaluation year, FHFA will award a separate
rating for each underserved market based on the quantitative,
qualitative, and extra credit-eligible activities assessments. Section
1282.36(c)(4) of the final rule provides that an Enterprise will
receive one of five ratings: Exceeds, High Satisfactory, Low
Satisfactory, Minimally Passing, or Fails. The final rule revises the
proposed rule process by eliminating the conversion of a 100 point
numeric scale specific to an Enterprises' Plan into a final rating. In
addition, the final rule includes Minimally Passing as a fifth rating
category, which was not included in the proposed rule Commenters
generally supported the proposed approach of using rating categories to
evaluate an Enterprise's performance under its Plan, with some
suggesting FHFA consider a rating structure with more tiers. A trade
association, for example, commented that the proposed rule's increase
in the number of ratings categories from the pass/fail ratings in the
2010 Duty to Serve proposed rule would provide greater incentives for
the Enterprises and help stakeholders identify areas for improvement in
the Enterprises' activities under the Duty to Serve. Several policy
advocacy organizations and one governmental entity recommended
expanding the proposed four rating categories to five to enable FHFA to
provide more meaningful distinctions in evaluations and ratings.
FHFA finds the comments compelling that the final rule should add
a fifth rating category of Minimally Passing. The Minimally Passing
rating will fall above the Fails rating and below the Low Satisfactory
rating. The Minimally Passing rating will convey that an Enterprise has
met a minimally compliant level of its Plan objectives but could better
use its resources to fulfill the intentions of the Duty to Serve
statute and regulation. Adding this fifth rating category will allow
FHFA to apply more meaningful distinctions to its evaluation of an
Enterprise's performance of its Plan objectives.

C. Ongoing Assessment of Evaluation and Rating Process

Because the process by which FHFA will evaluate and rate the
Enterprises' compliance with the final rule is new and in an effort to
consider the appropriate balance between compliance and regulatory
burden, FHFA considers it appropriate to do ongoing assessments of the
operational or other practical implications of the rating process. This
will allow both FHFA and the Enterprises to begin fulfilling the intent
of the Duty to Serve statute, while also recognizing that FHFA may wish
to adjust the implementation of the evaluation and rating process over
time. For this reason, Sec. 1282.36(c)(4)(ii) of the final rule
provides that FHFA will make such determinations as appropriate based
on evaluation of the program's parameters and operation, pursuant to
the Evaluation Guidance, regarding implementation of the rating
process.

D. Evaluation Guidance

Section 1282.36(d) of the final rule requires that FHFA prepare
Evaluation Guidance--a change in name from the proposed rule which used
the term ``Evaluation Guide.'' The final rule's description of the
content of the Evaluation Guidance is different from that of the
proposed rule because, as discussed above, the evaluation process and
scoring system are changed from the proposed rule. The final rule
states that the Evaluation Guidance will provide additional guidance on
the Plans, how the quantitative, qualitative, and extra credit
assessments will be conducted, how final ratings will be determined,
and such other matters as may be appropriate.
The final rule revises the process outlined in the proposed rule,
which stated that FHFA would issue to each Enterprise an Evaluation
Guide specifically tailored to its Plan after the Enterprises delivered
their final Plans to FHFA. Commenters, including a governmental entity,
a trade organization, several nonprofit lenders, several policy
advocacy organizations, and both Enterprises, supported the proposed
requirement that FHFA provide guidance on how it will evaluate
Enterprise compliance. Several policy advocacy organizations, a
governmental entity, and a trade organization also recommended that
FHFA seek public input on the Evaluation Guides.
Commenters, including several policy advocacy organizations, a
trade association, and both Enterprises, also provided feedback on the
appropriate timing for the Evaluation Guide. Both Enterprises expressed
concerns with the proposed timing and sequencing of the Evaluation
Guide. Freddie Mac recommended that guidance be made available to the
Enterprises substantially in advance of the required submission of the
Plans to FHFA. Fannie Mae stated that being advised of FHFA's scoring
methodology just 30 days before implementing a Plan could require mid-
course corrections and potentially disrupt planned activities. Under
the proposed rule process, FHFA would have developed the Evaluation
Guide for each Enterprise after the Enterprises' Plans were finalized,
based on the Enterprises' Plans and public input received on the
proposed Plans.
FHFA finds the commenters' arguments persuasive and has revised the
nature and timing of the Evaluation Guidance. Section 1282.36(d)(1) of
the final rule provides that FHFA will prepare one Evaluation Guidance
for both Enterprises, on a three-year cycle. This revises the approach
in the proposed rule, which would have provided an annual Evaluation
Guide to each Enterprise specifically tailored to its Plan. This change
is based on the change in the nature of the Evaluation Guidance in the
final rule, which will be applicable to both Enterprises and not
specifically tailored to an individual Plan. The change also aligns the
timing of the Evaluation Guidance with the Plan cycle. In addition, as
described below, the final rule allows for modification of the
Evaluation Guidance, which can address changes in circumstances,
markets, or updates to the Enterprises' Plans.
In order to provide the Enterprises with sufficient time to develop
quality draft Plans that are responsive to FHFA's expectations and
public input, Sec. 1282.36(d)(3) of the final rule provides that the
first proposed Evaluation Guidance will be provided to the Enterprises
within 30 days after the posting of the final rule on FHFA's Web site,
and posted to FHFA's Web site as soon as practical thereafter. FHFA
will provide timelines for the Evaluation Guidance for subsequent Plans
after the first Plan, including public input periods, 300 days before
the termination date of the Plan in effect, or a later date if
additional time is necessary.
In discussing the importance of clearly defining evaluation
criteria through guidance, one policy advocacy organization suggested
that FHFA be permitted to adjust its evaluation

[[Page 96285]]

criteria during a Plan cycle as the results of initial efforts reveal
new information. FHFA finds that providing Evaluation Guidance for a
three-year period, which can remain the same over time where
appropriate, but which can also be modified when there are lessons
learned and best practices are developed, is appropriate. For this
reason, the final rule provides that FHFA may modify the Evaluation
Guidance prior to or during the three-year cycle and may obtain
additional public input on the Evaluation Guidance. The modified
Evaluation Guidance would be effective for the subsequent evaluation
year.
FHFA agrees with the commenters' common theme that the Evaluation
Guidance should help provide accountability for Duty to Serve
implementation. Accordingly, Sec. 1282.36(d)(3) of the final rule
requires the Evaluation Guidance to be issued first as proposed
Evaluation Guidance, with a 120-day period for the public to provide
input on the proposed Evaluation Guidance to FHFA and the Enterprises.
However, in order to implement the Plans in a timely fashion and retain
operational flexibility, FHFA may revise the length of time the public
will have to provide input on proposed Evaluation Guidance for
subsequent Plans.

IV. Extra Credit-Eligible Activities, Including Residential Economic
Diversity Activities--Sec. 1282.36(c)(3)

As the third step of the evaluation and rating process, the final
rule designates two categories of extra credit-eligible activities: (1)
Residential economic diversity activities, and (2) other activities
that may be identified by FHFA as eligible for extra credit in the
Evaluation Guidance. FHFA will establish the method and criteria for
evaluating these extra credit-eligible activities in the Evaluation
Guidance.

A. Residential Economic Diversity Activities

Consistent with the proposed rule, Sec. 1282.36(c)(3) of the final
rule provides that the Enterprises may receive Duty to Serve extra
credit, which may be factored into their evaluation ratings, if their
qualifying activities within an underserved market in their Plans
contribute to residential economic diversity. FHFA will evaluate an
Enterprise's performance of qualifying residential economic diversity
activities using the qualitative assessment factors. As proposed, the
final rule defines a ``residential economic diversity activity'' as an
Enterprise activity in connection with mortgages on: (1) Affordable
housing in a high opportunity area; or (2) mixed-income housing in an
area of concentrated poverty. Definitions of these terms are discussed
below.
Qualifying Activities for Residential Economic Diversity
Section 1282.1 of the final rule defines qualifying ``residential
economic diversity activities'' to mean all eligible activities in the
underserved markets except energy or water efficiency improvement
activities and any additional activities determined by FHFA to be
ineligible. The proposed rule would have excluded Enterprise support
for energy or water efficient improvement activities from receiving
residential economic diversity extra credit because they typically do
not relate to the location of housing and, thus, do not appear to
further residential economic diversity. The proposed rule also would
have excluded Enterprise support for financing of manufactured housing
communities from receiving residential economic diversity extra credit
because the Enterprises generally do not have complete information on
residents' monthly housing costs, which is necessary to determine the
affordability of the community. The rule's census tract proxy
methodology for determining the affordability of a community (the
income level of the census tract) assumes that a community's
affordability matches the incomes of nearby residents, which means it
is not useful for determining whether a community contributes to
residential economic diversity. The proposed rule specifically
requested comment on whether this was the appropriate scope for the
proposed extra credit.
A number of policy advocacy and governmental organizations
recommended that FHFA treat Enterprise manufactured housing community
activities as eligible for extra credit under residential economic
diversity, and some noted that outside data can in some cases
substantiate whether these activities contribute to residential
economic diversity. Some nonprofit and governmental organizations also
recommended that energy efficiency improvement activities be eligible
for extra credit, as they may contribute to residential stability.
After considering the comments, FHFA agrees that manufactured
housing communities may contribute to residential economic diversity.
Accordingly, the final rule allows Enterprise manufactured housing
community activities to qualify for residential economic diversity
extra credit, but only if the Enterprise is able to substantiate the
affordability of homes in the manufactured housing community to very-
low, low-, or moderate-income households through use of the methodology
in Sec. 1282.38(f)(1) or another methodology FHFA has approved.
Consistent with the proposed rule, the final rule excludes
Enterprise support for energy or water efficiency improvement
activities from qualifying for extra credit, as FHFA continues to view
these activities as insufficiently related to residential economic
diversity.
Definition of ``High Opportunity Areas''
Section 1282.1 of the final rule defines ``high opportunity area''
primarily to mean an area designated by HUD as a Difficult-to-Develop
Area (DDA) during any year covered by a Plan or in the year prior to a
Plan's effective date, whose poverty rate is lower than the rate
specified by FHFA in the Evaluation Guidance. DDAs are areas where it
is difficult to create affordable housing due to high rents relative to
area median income, and they are generally considered to be a proxy for
higher opportunity areas. HUD is required to identify DDAs by the LIHTC
statute and does so annually.\124\ The definition in the final rule
also allows the Enterprises to utilize certain state or local
definitions of high opportunity areas from a geographically-applicable
LIHTC Qualified Allocation Plan (QAP).\125\
---------------------------------------------------------------------------

\124\ 26 U.S.C. 42(d)(5)(B)(iii).
\125\ LIHTC Qualified Allocation Plans govern the allocation of
9 percent LIHTCs. See 26 U.S.C. 42(m)(B).
---------------------------------------------------------------------------

The proposed rule would have defined ``high opportunity areas''
only as DDAs. The proposed rule specifically requested comment on
whether the proposed definition is the most appropriate, whether the
definition should use DDAs to define high opportunity areas outside of
metropolitan areas, and whether there is a factor-based definition that
would be preferable. The proposed rule also asked whether state-defined
high opportunity areas (or similar terms) should be incorporated in the
definition, and if so, how this could be implemented by the
Enterprises.
Several policy advocacy and nonprofit organizations directly
supported the proposed definition due to its empirical and
straightforward nature. Freddie Mac commented that FHFA should clarify
how to address annual changes in the areas HUD identifies as DDAs
because the

[[Page 96286]]

Enterprises are being asked to plan their Duty to Serve activities for
three years at a time. Neither Freddie Mac nor Fannie Mae commented in
favor of or in opposition to the proposed definition.
Critics of using DDAs exclusively as a proxy for high opportunity
areas noted that because HUD's DDA calculation methodology is used as
an allocation mechanism for limited tax credits under the LIHTC
program, it has a 20 percent nationwide population cut-off (applied
separately to metropolitan and non-metropolitan areas). As a result of
this limit, many high opportunity areas are not designated as DDAs.
Other commenters noted that four states have no DDAs in 2016. Because
of these reasons, multiple nonprofit and governmental organizations
recommended use of a modified version of HUD's methodology without the
national population cut-off. A policy advocacy organization suggested
that FHFA pair HUD's DDA designations with a poverty indicator in order
to ensure that areas designated as high opportunity do not have
disproportionately high poverty rates. Some nonprofit organizations
recommended that FHFA employ an opportunity index developed by an
outside party. A larger number of nonprofit and governmental
organizations suggested that FHFA defer to or incorporate state or
local definitions of high opportunity areas, such as those put forth in
an LIHTC QAP. Additionally, some nonprofit organizations stated that
FHFA should continue working to develop an ideal definition of a high
opportunity area, potentially by opening a separate comment period on
definitions related to residential economic diversity.
After considering the comments, FHFA has determined that it should
rely on a pre-existing government definition or index to measure high
opportunity areas. Neither FHFA nor the Enterprises provide affordable
housing subsidies, which can play a more direct role in driving the
location of affordable housing than the activities the Enterprises will
undertake in support of the Duty to Serve. As a result, FHFA wishes to
align its residential economic diversity policy with other federal
policy efforts. Additionally, creating an opportunity index would be
highly labor intensive. While DDAs have limits as a proxy for high
opportunity areas, they are widely understood by the affordable housing
community and play a central role in the LIHTC market. While a variety
of opportunity indices could in fact be useful, no commenters suggested
how FHFA should choose among the many indices that outside parties have
created, none of which is federally sanctioned. Further, FHFA believes
that the Enterprises could easily operationalize the DDA-based
definition and incorporate it into their systems.
However, FHFA agrees that DDAs are not a perfect proxy for high
opportunity areas. In addition, promoting residential economic
diversity is subject to much experimentation. FHFA is addressing these
concerns in the final rule in two ways. First, the final rule requires
a maximum poverty level for a HUD-designated DDA to qualify as a high
opportunity area. As one commenter suggested, this will eliminate
higher-poverty areas that are unlikely to be areas of opportunity. FHFA
will establish this poverty rate threshold for each Plan period in the
Evaluation Guidance. In setting this poverty rate threshold, FHFA will
balance its desire to exclude high-poverty DDAs from its definition of
high opportunity areas with its desire to ensure that its definition
covers a reasonable segment of the population. To address Freddie Mac's
concern about annual changes in the areas HUD designates as DDAs, the
final rule allows any area meeting the poverty threshold and designated
as a DDA by HUD in the year before the Plan takes effect or during any
of the three years of the Plan to qualify as a high opportunity area.
Second, the final rule allows state and local definitions of high
opportunity areas in LIHTC QAPs to qualify where they meet certain
criteria. State and local definitions of high opportunity areas can be
tailored to a locale's unique circumstances and may change over time.
Many states in recent years have experimented with new definitions of,
and means of encouraging activity in, high opportunity areas in their
QAPs. From 2013 to 2015, 19 states added language to their QAPs related
to high opportunity areas.\126\ For a definition of a high opportunity
area in a QAP to qualify as a high opportunity area under the final
rule, it will have to be specifically identified by FHFA in the final
Evaluation Guidance.
---------------------------------------------------------------------------

\126\ These definitions are explored and catalogued in National
Housing Trust, ``Preservation and Opportunity Neighborhoods in the
Low Income Housing Tax Credit Program'' (2015), available at http://prezcat.org/related-catalog-content/preservation-and-opportunity-neighborhoods-low-income-housing-tax-credit (last accessed July 28,
2016).
---------------------------------------------------------------------------

There are considerable operational barriers to allowing the
Enterprises to utilize all state and local QAP definitions of high
opportunity areas for Duty to Serve purposes. States and localities may
attempt to promote development in higher opportunity areas without
explicitly defining or using the terminology ``high opportunity
areas,'' which means FHFA cannot always determine whether a QAP offers
a usable definition for Duty to Serve purposes. States and localities
also may encourage activities in high opportunity areas using methods
that do not allow FHFA to reach a firm conclusion on whether an area is
definitively a high opportunity area or not. At the same time, states
and localities employ different indicators for high opportunity areas.
As a result of these challenges, the final rule utilizes DDAs, with
a poverty level threshold, as the primary definition of high
opportunity areas. However, the rule also permits the Enterprises to
use approved state and local definitions of high opportunity areas in
geographically-applicable QAPs that meet specific criteria. The
specific criteria FHFA will use to allow state and local definitions
will be described in the proposed Evaluation Guidance, which will be
subject to public input. The final Evaluation Guidance will consider
submissions received during the public input period and identify the
state and local definitions of high opportunity areas that FHFA will
accept for the duration of the Plan period. If states and localities
continue to refine their definitions of high opportunity areas and
expand the use of tools allowing stakeholders to clearly identify those
areas, FHFA envisions utilizing state and local definitions to a
greater degree in subsequent Plan periods.
Definition of ``Area of Concentrated Poverty''
The final rule considers activities in areas of concentrated
poverty that facilitate financing of mixed-income housing as promoting
residential economic diversity. Section 1282.1 of the final rule
defines an ``area of concentrated poverty'' as a census tract
designated by HUD as a ``Qualified Census Tract'' (QCT) or a
``Racially- or Ethnically-Concentrated Area of Poverty'' (R/ECAP) in
the year before the Plan takes effect or during any of the three years
of the Plan. The proposed rule would have defined ``area of
concentrated poverty'' only as HUD-designated QCTs.
QCTs are generally census tracts where 50 percent of households
have incomes below 60 percent of the area median income or that have a
poverty rate of 25 percent or more.\127\ HUD is required by the LIHTC
statute to

[[Page 96287]]

identify QCTs, and does so annually.\128\ R/ECAPs are generally census
tracts with (i) a non-white population of 50 percent or more and (ii) a
poverty rate of 40 percent or more, or that is three or more times the
average tract poverty rate for the metro/micro area, whichever is
lower.\129\
---------------------------------------------------------------------------

\127\ For the 2016 QCTs, see 80 FR 73201 (Nov. 24, 2015).
\128\ 26 U.S.C. 42(d)(5)(B)(ii).
\129\ HUD's approach is described in U.S. Department of Housing
and Urban Development, ``AFFH Data Documentation,'' (2016),
available at https://www.hudexchange.info/resources/documents/AFFH-Data-Documentation.docx (last accessed July 28, 2016). Outside of
Core-Based Statistical Areas (CBSAs), the racial/ethnic
concentration threshold is set at 20 percent.
---------------------------------------------------------------------------

The proposed rule specifically requested comment on whether FHFA
should consider other or additional definitions of ``area of
concentrated poverty,'' such as a definition similar to HUD-designated
R/ECAPs. Some nonprofit and governmental organizations explicitly
supported FHFA's proposed definition because QCTs cover a wider band of
lower-income neighborhoods than R/ECAPs. Some nonprofit organizations
favored defining ``areas of concentrated poverty'' as HUD-designated R/
ECAPs without elaborating on their rationale. Other nonprofit and
governmental organizations recommended that FHFA consider an area to
qualify if it is designated as either a QCT or an R/ECAP because this
would encompass a larger number of low-income areas than utilizing
either designation by itself.
There are considerably more QCTs (13,619 census tracts) than R/
ECAPs (4,161 census tracts). Additionally, QCTs and R/ECAPs generally
overlap; only 600 R/ECAPs (14 percent) are not also QCTs. These 600
census tracts, however, contain 2.3 million residents.\130\ Therefore,
using R/ECAPs in addition to QCTs helps to identify additional
underserved areas with higher poverty levels that would benefit from
Enterprise activities under the Duty to Serve. For these reasons, the
final rule includes R/ECAPs in the definition of ``area of concentrated
poverty.''
---------------------------------------------------------------------------

\130\ Analysis based on 2016 DDA and 2013 R/ECAP data from HUD.
---------------------------------------------------------------------------

Revitalization in Areas of Concentrated Poverty
In the proposed rulemaking, FHFA considered but did not provide
that the Enterprises may receive extra credit when their activities are
part of or contribute to revitalization plans in areas of concentrated
poverty. FHFA also did not set forth criteria for identifying such
plans. The proposed rule specifically requested comment on whether CNI
and HUD/USDA-designated Promise Zones would be useful for purposes of
denoting areas of concentrated poverty subject to revitalization plans.
The proposed rule also asked whether other consistent criteria could be
applied for this purpose.
Commenters were divided on this topic. A number of nonprofit
organizations supported using CNI, Promise Zones, or other federal
designations for purposes of determining whether Enterprise activities
are part of or contribute to a revitalization plan in an area of
concentrated poverty, while several other nonprofit and governmental
organizations opposed it, partially because revitalization plans are
more typically led by states or localities. Among those who were
supportive, some offered tepid support for utilizing CNI or Promise
Zones, noting that there are a limited number of these areas. One
commenter suggested that FHFA also allow state and local definitions of
revitalization plans to qualify, while another commenter suggested FHFA
hold a separate comment period on utilizable definitions.
FHFA continues to find that it cannot adequately identify
revitalization plans or implement in the Duty to Serve process the
diverse definitions set out for these plans by states and localities.
Accordingly, the final rule does not add a revitalization component to
residential economic diversity.
Definition of ``Mixed-Income Housing''
Section 1282.1 of the final rule defines ``mixed-income housing''
as a multifamily property or development--which may include or comprise
single-family units--that serves very low-, low-, or moderate-income
families, where: (i) A minimum percentage of units as specified in the
Evaluation Guide are unaffordable to low-income families, or to
families at higher income levels as specified therein; and (ii) a
minimum percentage of units as specified in the Evaluation Guide are
affordable to low-income families, or to families at lower income
levels as specified therein. The proposed rule would have defined
``mixed-income housing'' to require that at least 25 percent of the
units are affordable only to households with incomes above moderate-
income levels.
FHFA specifically requested comment on whether the proposed
definition is appropriate, including whether minimum thresholds for the
percentage of units affordable to very low-, low, or moderate-income
households should be included. A number of nonprofit organizations
suggested that the definition should contain a minimum percentage of
units that are affordable to very low-, low-, or moderate-income
households. Setting a minimum threshold would ensure that the mixed-
income housing the Enterprises are encouraged to support serves a wide
diversity of income levels. While one nonprofit organization noted that
there is inadequate research to empirically guide setting unit and
income thresholds for mixed-income housing, a state housing finance
agency suggested that FHFA consider the standards set out in the LIHTC
program.
A nonprofit organization recommended that FHFA allow developments
with a significant share of unrestricted units (available to households
of any income) to be eligible for extra credit, regardless of whether
the area's current market rent is unaffordable to households at or
below moderate-income levels. This commenter argued that generally
market rents in areas of concentrated poverty are relatively
affordable, at least in the near term.
FHFA agrees that the proposed definition of ``mixed-income
housing'' could be strengthened to ensure the Enterprises are
encouraged to support sustainable mixed-income housing that serves a
diversity of income levels. However, given that an appropriate standard
may differ between markets and may change over time, the definition
will be spelled out in the Evaluation Guidance, rather than in the
final rule. FHFA plans to specify in its proposed Evaluation Guidance
that mixed-income housing must contain a minimum share of affordable
units that mirrors the requirements set out in the LIHTC program (20
percent of units must be affordable for households with incomes at or
below 50 percent of area median income, or 40 percent of units must be
affordable to households with incomes at or below 60 percent of area
median income).\131\ FHFA finds that this well-known metric of
affordability is the best standard available at this time.
---------------------------------------------------------------------------

\131\ 26 U.S.C. 42(g)(1).
---------------------------------------------------------------------------

FHFA also recognizes that, in areas of concentrated poverty, market
rents may be relatively affordable, which means developers may face
difficultly at least initially in attracting higher-income households
to these developments. This could make it difficult to finance
properties that meet the requirement for a certain percentage of units
that are unaffordable to moderate-income households specified in the
proposed rule. However, FHFA still finds that a minimum threshold of
units for higher-

[[Page 96288]]

income households is important in order to ensure that mixed-income
housing is not solely occupied by very low- or low- income households.
The threshold of units that must be unaffordable to low-income
households, or to households at higher income levels, will also be
specified in the Evaluation Guide. At this time, FHFA plans to specify
that mixed-income housing must include at least 20 percent of units
that are affordable only to households with incomes above low-income
levels.

B. Other Activities Identified in the Evaluation Guidance as Eligible
for Extra Credit

Under the final rule, FHFA may also designate in the Evaluation
Guidance other activities as extra credit-eligible activities. This
would not require the Enterprises to undertake any activity designated
as eligible for extra credit. Instead, it would provide an incentive
for the Enterprises to include those designated activities in their
Plans. In determining whether to designate an activity as eligible for
extra credit, FHFA will consider whether the activity could be
considered more challenging, or whether it serves a part of an
underserved market that is relatively less well-served. For example,
activities such as serving high-needs rural populations or manufactured
housing communities with tenant pad lease protections could foreseeably
be designated as eligible for extra credit due to their challenging
nature. This approach also responds to commenters, as described above,
who encouraged FHFA to modify the proposed evaluation and ratings
approach to encourage the Enterprises to undertake more challenging
activities.

V. General Requirements for Credit--Sec. 1282.37

Section 1282.37 of the final rule sets forth general counting
requirements for whether and how activities or objectives may receive
Duty to Serve credit. With some exceptions, the counting rules and
other requirements are similar to those in the proposed rule and FHFA's
housing goals regulation. FHFA received few comments on these
provisions.

A. No Credit Under Any Evaluation Area--Sec. 1282.37(b)

Section 1282.37(b) of the final rule identifies specific Enterprise
activities that are not eligible to receive Duty to Serve credit under
any evaluation area, as discussed below.
Housing Trust Fund and Capital Magnet Fund contributions.
Consistent with the proposed rule, and in accordance with the statutory
provisions, Sec. 1282.37(b)(1) of the final rule provides that
contributions to the Housing Trust Fund \132\ and the Capital Magnet
Fund,\133\ and Enterprise mortgage purchases funded with such grant
amounts, are ineligible for Duty to Serve credit. This prohibition is
discussed further above in the discussion on Other Federal Affordable
Housing Programs.
---------------------------------------------------------------------------

\132\ See 12 U.S.C. 4565(d)(4).
\133\ See 12 U.S.C. 4569(h)(7).
---------------------------------------------------------------------------

HOEPA mortgages. As proposed, Sec. 1282.37(b)(2) of the final rule
prohibits Duty to Serve credit for HOEPA mortgages.\134\ A federal
regulator commented that loans for manufactured homes are more likely
to be classified as ``high-cost'' loans under HOEPA, and a policy
advocacy organization supported excluding HOEPA mortgages from
receiving Duty to Serve credit because they do not adequately protect
consumers. A manufactured housing trade association suggested that FHFA
lacks the legal authority to require consumer protections on
manufactured home loans as a condition of eligibility to received Duty
to Serve credit. FHFA has determined that it possesses such authority,
and that Enterprise support for HOEPA mortgages, whether for
manufactured home loans or for mortgages for site-built homes, would
not fulfill the purposes of the Duty to Serve.
---------------------------------------------------------------------------

\134\ See 15 U.S.C. 1602(bb).
---------------------------------------------------------------------------

Subordinate liens on multifamily properties. As proposed, Sec.
1282.37(b)(3) of the final rule prohibits Duty to Serve credit for
subordinate liens on multifamily properties, except for subordinate
liens originated for energy or water efficiency improvements on
multifamily rental properties that meet the requirements in Sec.
1282.34(d)(2). Fannie Mae commented that subordinate loans for capital
improvements to expand the useful life or significantly improve the
condition or quality of a property and that result in preserving
affordability should receive Duty to Serve creditable. Given the
regulatory and statutory restrictions on most affordable properties,
FHFA had determined that subordinated loans for capital improvements
are not an effective tool to preserve affordability at this time. In
addition, it is not a standard practice in the industry to allow
subordinate loans for preserving affordability, as these could present
excessive risk to investors in the subordinate loan.
Under the final rule, subordinate liens for energy or water
efficiency improvements on existing multifamily rental properties
meeting the requirements in Sec. 1282.34(d)(2) are eligible for Duty
to Serve credit. These subordinate liens extend the useful life of the
property and also enhance the overall value of the property by reducing
operating expenses.
Subordinate liens on single-family properties. As proposed, Sec.
1282.37(b)(4) of the final rule excludes subordinate liens on most
single-family properties from receiving Duty to Serve credit, including
subordinate liens for energy efficiency improvements on single-family
properties. However, in a change from the proposed rule, subordinate
liens on shared appreciation loans that meet all of the requirements in
Sec. 1282.34(d)(4) are eligible for Duty to Serve credit. As one
nonprofit organization commented, these liens are unlike standard
second lien mortgages. They are due upon the sale of the property and
typically have no interest. Moreover, the borrower does not make
monthly payments on these second liens, except where there is a modest
interest rate payment that covers the cost of program implementation,
asset management, and ongoing monitoring. In effect, these second liens
are vehicles for maintaining the subsidy with the property when the
property is sold.
Under the final rule, not all shared appreciation loans are
eligible for Duty to Serve credit. Those not eligible are proprietary
shared appreciation loans, where an investor receives part of the
equity in exchange for making the home affordable for a single buyer
only. Such loans do not preserve the affordability of the unit for
subsequent buyers.
LIHTC equity investments. Section 1282.37(b)(5) of the final rule
prohibits Duty to Serve credit for LIHTC equity investments in a
property, except where the property is located in a rural area. LIHTC
equity investments are discussed above under the rural markets under
Sec. 1282.35.
Permanent construction take-out loans and Additional Activities
under the affordable housing preservation market. Section 1282.37(b)(6)
of the final rule provides that Duty to Serve credit will not be
provided for permanent construction take-out loans and Additional
Activities under the affordable housing preservation market, except as
provided in Sec. 1282.37(c). The exceptions are discussed above under
the affordable housing preservation market under Sec. 1282.34.

B. No Credit Under Loan Purchase Evaluation Area--Sec. 1282.37(d)

Consistent with the proposed rule, Sec. 1282.37(d) of the final
rule sets forth

[[Page 96289]]

activities that are not eligible to receive Duty to Serve credit under
the loan purchase evaluation area, even if the activity would otherwise
receive credit under Sec. 1282.38. These include generally: Mortgage
purchases on secondary residences; single-family refinancing mortgages
resulting from conversion of balloon notes to fully amortizing notes if
the Enterprise already owns the balloon note at the time conversion
occurs; purchases of mortgages that previously received Duty to Serve
credit within the immediately preceding five years; mortgage purchases
where the property or any units therein have not been approved for
occupancy; any interests in mortgages that FHFA determines will not be
treated as interests in mortgages; and purchases of state and local
government housing bonds except as provided in Sec. 1282.39(h).

C. FHFA Review of Activities or Objectives--Sec. 1282.37(e)

Consistent with the proposed rule, Sec. 1282.37(e) of the final
rule provides that FHFA may determine whether and how any activity or
objective will receive Duty to Serve credit under an underserved market
in a Plan, including treatment of missing data, and FHFA will notify
each Enterprise in writing of any determination regarding the treatment
of any activity or objective. Section 1282.37(e) also adds a provision
that was not included in the proposed rule which requires FHFA to make
any such determinations available to the public on FHFA's Web site.

D. Year in Which Activity or Objective Will Receive Credit--Sec.
1282.37(f)

As proposed, Sec. 1282.37(f) of the final rule provides that an
activity or objective eligible for Duty to Serve credit will receive
such credit in the year in which it is completed. FHFA may determine
that credit is appropriate for an activity or objective in which an
Enterprise engages, but does not complete in a particular year, except
that activities or objectives under the loan purchase evaluation area
will receive credit in the year in which the Enterprise purchased the
mortgage.

E. Credit Under One Evaluation Area--Sec. 1282.37(g)

As proposed, Sec. 1282.37(g) of the final rule provides that an
activity or objective eligible for Duty to Serve credit will receive
such credit under only one evaluation area in a particular underserved
market. The rationale for this provision is discussed above under the
Plan objectives under Sec. 1282.32(f).

F. Credit Under Multiple Underserved Markets--Sec. 1282.37(h)

As proposed, Sec. 1282.37(h) of the final rule provides that an
activity or objective, including financing of dwelling units by an
Enterprise's mortgage purchase, that is eligible for Duty to Serve
credit will receive such credit under each underserved market for which
the activity or objective qualifies in that year. For example, if a
borrower uses a Section 8 voucher \135\ to help buy a manufactured home
in the Lower Mississippi Delta, and if an Enterprise subsequently
purchases that loan, the purchase would receive Duty to Serve credit
under the manufactured housing, affordable housing preservation, and
rural markets.
---------------------------------------------------------------------------

\135\ The Housing Opportunity through Modernization Act of 2016
provides that Section 8 vouchers may be used for payment of notes on
manufactured homes. See Housing Opportunity through Modernization
Act of 2016, sec. 112, Public Law 114-201, 130 Stat. 782 (July 29,
2016), available at https://www.gpo.gov/fdsys/pkg/PLAW-114publ201/pdf/PLAW-114publ201.pdf. The provision on Section 8 vouchers for
manufactured homes has not been implemented as of the time of this
rule.
---------------------------------------------------------------------------

VI. General Requirements for Loan Purchases--Sec. 1282.38

In order to be eligible to receive Duty to Serve credit for loan
purchases, a loan must be on housing affordable to very low-, low-, or
moderate income families, regardless of whether the property is owner-
occupied or rental. Sections 1282.17, 1282.18, and 1282.19 of part 1282
define ``affordability'' for owner-occupied and rental units. The
tables in these sections adjust the maximum percentage of area median
income based on family size and the size of the dwelling unit, as
measured by the number of bedrooms.

A. Counting Dwelling Units--Sec. 1282.38(b)

Consistent with the proposed rule, Sec. 1282.38(b) of the final
rule provides that performance under the loan purchase evaluation area
will be measured by counting dwelling units affordable to very low-,
low-, and moderate-income families.

B. Credit for Owner-Occupied Units--Sec. 1282.38(c)

As proposed, Sec. 1282.38(c) of the final rule provides that
mortgage purchases financing owner-occupied single-family properties
will be evaluated based on a comparison of the income of the
mortgagor(s) to the area median income at the time the mortgage was
originated, using the appropriate percentage factor in Sec. 1282.17.
If the income of the mortgagor(s) is not available, no Duty to Serve
credit will be provided under the loan purchase evaluation area.

C. Credit for Rental Units--Use of Rent--Sec. 1282.38(d)(1)

As proposed, Sec. 1282.38(d)(1) of the final rule provides that
for Enterprise mortgage purchases financing single-family rental units
and multifamily rental units, affordability is determined based on rent
and whether the rent is affordable to the income groups targeted by the
Duty to Serve. A rent is affordable if the rent does not exceed the
maximum levels as provided in Sec. 1282.19.

D. Credit for Rental Units--Affordability of Rents Based on Housing
Program Requirements--Sec. 1282.38(d)(2)

Consistent with the proposed rule, Sec. 1282.38(d)(2) of the
final rule provides that where a multifamily property is subject to an
affordability restriction under a housing program that establishes the
maximum permitted income level of a tenant or a prospective tenant or
the maximum permitted rent, the affordability of units in the property
may be determined based on the maximum permitted income level or
maximum permitted rent established under such housing program for those
units, subject to certain restrictions set forth in the rule.

E. Missing Data or Information for Rental Units--1282.38(e)(2)

Under Sec. 1282.38(e)(2) of the final rule, when an Enterprise
lacks sufficient information on the rents, the Enterprise's performance
regarding the rental units may be evaluated using estimated
affordability information, except that an Enterprise may not estimate
affordability of rental units for purposes of receiving extra credit
for residential economic diversity activities. As proposed, the final
rule provides that estimated affordability information is calculated by
multiplying the number of rental units with missing affordability
information in properties securing the mortgages purchased by the
Enterprise in each census tract by the percentage of all moderate-
income rental dwelling units in the respective tracts, as determined by
FHFA.
The housing goals regulation \136\ applies a 5 percent limit on the
number of rental units with missing rent data for which an Enterprise
may estimate affordability of rents. The proposed rule specifically
requested comment on whether there are better methods than the proposed
methodology to estimate affordability when rent information is

[[Page 96290]]

missing, and whether the Duty to Serve rule should cap the number of
units with missing data for which an Enterprise could estimate
affordability.
---------------------------------------------------------------------------

\136\ 12 CFR 1282.15(e)(3).
---------------------------------------------------------------------------

No commenters addressed these questions. In FHFA's experience with
the housing goals, the Enterprises have not come close to reaching the
5 percent limit. Because the rent rolls determine the viability of a
property as an investment, the Enterprises generally obtain this
information and use it as part of their underwriting. Accordingly,
consistent with the proposed rule, Sec. 1282.38(e)(2) of the final
rule does not include a limit on the number of rental units for which
an Enterprise may estimate affordability each year.
In a change from the proposed rule, Sec. 1282.38(e)(2) of the
final rule does not permit the Enterprises to estimate affordability of
rental units when rent data are missing for purposes of receiving extra
credit for residential economic diversity activities. Estimating
affordability under the methodology discussed above would assume that a
multifamily development's affordability mirrors the income
characteristics of the tract in which it is located, which is not
useful for determining whether the development contributes to
residential economic diversity as defined in the final rule.

F. Credit for Blanket Loans on Manufactured Housing Communities--Sec.
1282.38(f)

Section 1282.38(f) of the final rule sets forth how determinations
of affordability of manufactured housing communities will be made.
These determinations are discussed above in the manufactured housing
market section.

G. Application of Median Income--Sec. 1282.38(g)

Consistent with the proposed rule, Sec. 1282.38(g) of the final
rule includes provisions on determining an area's median income.

H. Newly Available Data--1282.38(h)

As proposed, Sec. 1282.38(h) of the final rule provides that when
data is used to determine whether a dwelling unit receives Duty to
Serve credit under the loan purchase evaluation area and new data is
released after the start of a calendar quarter, the new data need not
be used until the start of the following quarter.

VII. Special Requirements for Loan Purchases--Sec. 1282.39

Section 1282.39 of the final rule provides that the activities
identified in this section will be treated as mortgage purchases and
are eligible to receive Duty to Serve credit under the loan purchase
evaluation area.

A. Credit Enhancements--Sec. 1282.39(b)

Consistent with the proposed rule, Sec. 1282.39(b) of the final
rule identifies the specific circumstances under which dwelling units
financed under a credit enhancement entered into by an Enterprise will
be treated as mortgage purchases.

B. Risk-Sharing--Sec. 1282.39(c)

Consistent with the proposed rule, Sec. 1282.39(c) of the final
rule provides that mortgages purchased under risk-sharing arrangements
between an Enterprise and any federal agency under which the Enterprise
is responsible for a substantial amount of the risk will be treated as
mortgage purchases. Fannie Mae commented that this provision would have
the effect of excluding loans under a number of FHA, USDA, and Veterans
Administration programs from receiving Duty to Serve credit.
The Duty to Serve counting rules are structured such that unless a
particular loan type is specifically identified as being ineligible to
receive Duty to Serve credit, it is eligible to receive credit provided
the borrower income and other requirements in the rule are satisfied.
Thus, Sec. 1282.39(c) does not exclude from receiving credit
Enterprise purchases of Title 1 loans, USDA Section 502 and 538 loans,
Section 184 Indian Home Loan Guarantee Program loans, Section 542(b)
loans, or other similar types of loans. The only loans that Sec.
1282.39(c) specifically excludes from receiving credit are mortgages
purchased under risk-sharing arrangements between an Enterprise and a
federal agency where the Enterprise is not responsible for a
substantial amount of the risk.

C. Participations--Sec. 1282.39(d)

As proposed, Sec. 1282.39(d) of the final rule provides that
participations purchased by an Enterprise will be treated as mortgage
purchases only when the Enterprise's participation in the mortgage is
50 percent of more.

D. Cooperative Housing and Condominiums--Sec. 1282.39(e)

As proposed, Sec. 1282.39(e) of the final rule provides that the
purchase of a mortgage on a cooperative housing unit (share loan) or on
a condominium unit will be treated as a mortgage purchase, with
affordability determined based on the income of the mortgagor(s). The
final rule also provides that the purchase of a blanket mortgage on a
cooperative building or on a condominium project will be treated as a
mortgage purchase.

E. Seasoned Mortgages--Sec. 1282.39(f)

Consistent with the proposed rule, Sec. 1282.39(f) of the final
rule provides that an Enterprise's purchase of a seasoned mortgage will
be treated as a mortgage purchase.

F. Purchase of Refinancing Mortgages--Sec. 1282.39(g)

As proposed, Sec. 1282.39(g) of the final rule provides that an
Enterprise's purchase of a refinancing mortgage will be treated as a
mortgage purchase only if the refinancing is an arms-length transaction
that is borrower-driven.

G. Mortgage Revenue Bonds--Sec. 1282.39(h)

Consistent with the proposed rule, Sec. 1282.39(h) of the final
rule provides that the purchase or guarantee by an Enterprise of a
mortgage revenue bond issued by a state or local housing finance agency
will be treated as a purchase of the underlying mortgages only to the
extent the Enterprise has sufficient information to determine whether
the underlying mortgages or mortgage-backed securities serve the income
groups targeted by the duty to serve.

H. Seller Dissolution Option--Sec. 1282.39(i)

As proposed, Sec. 1282.39(i) of the final rule sets forth the
specific circumstances under which mortgages acquired by an Enterprise
through transactions involving seller dissolution options will be
treated as mortgage purchases.

VIII. Failure To Comply; Housing Plans--Sec. Sec. 1282.40, 1282.41

The Safety and Soundness Act provides that the Duty to Serve
underserved markets is enforceable to the same extent and under the
same enforcement provisions as are applicable to the Enterprise housing
goals, except as otherwise provided.\137\ Accordingly, under Sec.
1282.40 of the final rule, if an Enterprise has not complied with, or
there is a substantial probability that an Enterprise will not comply
with, the Duty to Serve a particular underserved market in a given
year, FHFA will determine whether compliance by the Enterprise with the
activities and objectives in its Plan is or was feasible. In
determining feasibility, FHFA will consider factors such as market and
economic conditions and the financial condition

[[Page 96291]]

of the Enterprise. If FHFA determines that compliance is or was
feasible, FHFA will follow the procedures in 12 U.S.C. 4566(b).
---------------------------------------------------------------------------

\137\ 12 U.S.C. 4566(a)(4).
---------------------------------------------------------------------------

A determination of a failure to comply means that an Enterprise has
received a rating of Fails under its Plan for a particular underserved
market in a given year. A determination of a substantial probability
that an Enterprise will fail to comply means that there is a
substantial probability that the Enterprise will receive a rating of
Fails under its Plan for a particular underserved market in a given
year.
Consistent with the proposed rule, Sec. 1282.41 of the final rule
includes requirements for an Enterprise to submit to FHFA a housing
plan, in the Director's discretion, if the Director determines that the
Enterprise did not comply with, or there is a substantial probability
that an Enterprise will not comply with, the Duty to Serve a particular
underserved market. There were no comments specifically addressing
enforcement.

IX. Enterprise Duty To Serve Reporting to FHFA--Sec. 1282.66

Consistent with the proposed rule, Sec. 1282.66 of the final rule
requires the Enterprises to submit to FHFA quarterly reports on the
activities and objectives in their Plans for each underserved market.
The fourth quarterly report will serve as and be termed the annual
report.
As proposed, Sec. 1282.66(a) of the final rule provides that the
first and third quarter reports must include detailed year-to-date
information on the Enterprise's progress toward meeting the activities
and objectives in its Plan only for the loan purchase evaluation area
for each underserved market. Section 1282.66(a) of the final rule
provides that the first and third quarter reports are due to FHFA
within 60 days after the end of the quarter.
As proposed, Sec. 1282.66(b) of the final rule provides that the
second quarter report must include detailed year-to-date information on
the Enterprise's progress toward meeting all of the activities and
objectives in its Plan for each underserved market. Section 1282.66(b)
also requires that the second quarter report contain narrative and
summary statistical information for the Plan objectives, supported by
appropriate transaction-level data (which was discussed in the proposed
rule). Section 1282.66(b) provides that the second quarter report is
due to FHFA within 60 days after the end of the second quarter. In the
proposed rule, FHFA referred to this report as the ``semi-annual''
report. FHFA has changed the name of this report to the ``second
quarter'' report in the final rule but has retained the requirements of
the ``semi-annual'' report from the proposed rule. FHFA changed the
name of this report in order to more closely follow the naming
convention for reports under the housing goals, and because the name
``semi-annual report'' may imply that the report is due twice a year,
though the final rule states that the report is due only once a year
after the second quarter. When discussing comments below that
referenced this report, FHFA refers to it as the ``semi-annual'' report
for ease of reference because that is the terminology used by the
commenters and in the proposed rule.
As proposed, Sec. 1282.66(c) of the final rule provides that the
annual report must include information on the Enterprise's performance
on all of the activities and objectives in its Plan for each
underserved market during the evaluation year. At a minimum, the annual
report must include: Narrative and summary statistical information for
the Plan objectives over the evaluation year, supported by appropriate
transaction-level data (which was discussed in the proposed rule); a
description of the Enterprise's market opportunities for purchasing
loans during the evaluation year, to the extent data is available; the
volume of qualifying loans purchased by the Enterprise during the
evaluation year; a comparison of the Enterprise's loan purchases with
those in prior years; and a comparison of market opportunities with the
size of the relevant markets in the past, to the extent data is
available. Market opportunities for purchasing loans could include
market or regulatory factors that may affect lenders' decisions to
retain loans in portfolio or sell them, the availability and pricing of
credit enhancements from third parties, and competition from other
secondary market participants. Section 1282.66(c) provides that the
annual report is due to FHFA within 75 days after the end of each
calendar year.
Section 1282.66(d) of the final rule provides that FHFA will make
public information from the first quarter, second quarter, and third
quarter reports within a reasonable time after the end of the calendar
year for which they apply. FHFA will make public information from the
annual report within a reasonable time after its receipt. FHFA will
omit any confidential and proprietary information from the information
it provides to the public from the Enterprises' reports. During the
final year of the three-year period covered by a Plan, FHFA will also
make public certain narrative information from each Enterprise's second
quarter report for that year, omitting data on loan purchases and any
additional confidential or proprietary information, within a reasonable
time after receiving the second quarter report. The proposed rule did
not specifically address public disclosure of the reports or how any
confidential or proprietary data or information in the reports would be
treated.
Several policy advocacy organizations supported the proposed
reporting requirements, and no commenters specifically opposed the
proposed requirements. As further discussed below, two policy advocacy
organizations suggested FHFA consider having the Enterprises report on
all activities and objectives quarterly and provide that information to
the public. The commenters proposed this as one way to allow the public
to weigh in on the next cycle's Plans with information on Enterprises'
performance in the final year of the current Plan cycle. Several policy
advocacy organizations noted that a significant amount of time could
elapse between when the Enterprises submit their annual reports to FHFA
and when FHFA finalizes its evaluation for the Enterprises' Duty to
Serve compliance. Given this timeline in FHFA's proposed reporting
requirements, these commenters stated that FHFA should meet with market
participants in order to learn from them how the Plans are operating
and the challenges the Enterprises may face in accomplishing their
objectives.
FHFA has determined that the reports as detailed in Sec. 1282.66
will provide FHFA with information necessary to monitor and evaluate
Enterprise compliance with their Plans. FHFA has also determined that
the reporting requirements are not likely to create operational
concerns for the Enterprises, given their experience with FHFA's
reporting requirements for the housing goals.
Although FHFA did not specifically request comment on whether the
Enterprises' reports should be made public, both Enterprises and
several policy advocacy organizations and nonprofit organizations
provided comments on the extent to which the reports should be made
public. Fannie Mae requested that FHFA make the annual report public
but not the first quarter, semi-annual, and third quarter reports
because these reports will contain information on its progress toward
meeting the activities and objectives in its Plan and include
confidential and proprietary data. Freddie Mac recommended that none of

[[Page 96292]]

the reports be publicly disclosed because they would disclose
information that would reveal Freddie Mac's progress and that would
influence the Enterprises' development of additional initiatives.
Freddie Mac recommended that, at the very least, parts of each report
should be considered confidential, in order to allow for even
competition between the Enterprises and among other market
participants.
In contrast, a policy advocacy organization recommended that all of
the reports be made public so that the public could review the reports
and play a role in holding the Enterprises accountable and in helping
develop their subsequent Plans. A nonprofit organization echoed this
recommendation without providing a reason, and commented that the
public versions should include protections for proprietary information
and sensitive content. Another nonprofit organization stated that the
annual report should be made public in order to make the Duty to Serve
process transparent.
After considering the comments, FHFA is persuaded that public input
on certain information in the Enterprises' reports can provide valuable
information for FHFA's evaluation process and the development of the
subsequent Plans. At the same time, FHFA is mindful that public access
to information in the Enterprise's reports should not compromise the
Enterprises' progress in meeting their Plan activities and objectives
during the evaluation year, especially where the reports contain
confidential or proprietary data or information. In considering the
Enterprises' concern about revealing their progress under their Plans,
FHFA has determined that public release of data under the loan purchase
evaluation area during the evaluation year could impair the
Enterprises' activity in the underserved market. Accordingly, Sec.
1282.66(d) of the final rule provides that FHFA will make public
information derived from the Enterprises' first quarter, second
quarter, and third quarter reports, omitting any confidential and
proprietary information and data, at a reasonable time after the end of
the calendar year for which they apply. This will mitigate the concerns
the Enterprises expressed about revealing their progress under their
Plans. FHFA will make public information derived from the Enterprises'
annual reports, omitting any confidential and proprietary data, within
a reasonable time after receiving them.
A policy advocacy organization noted that the Enterprises will
submit their proposed new Plans to FHFA in the third year of their
current three-year Plans. The commenter pointed out that without public
access to information on the Enterprises' performance on their current
Plans during the third year, the public would have to review and
provide input on the Enterprises' proposed new Plans without complete
information on the Enterprises' performance to date. Because
information on Enterprise progress on all of their Plan activities and
objectives will be included in their semi-annual reports, the commenter
recommended that FHFA disclose and invite public input on the semi-
annual reports in considering the Enterprises' proposed new Plans.
Alternatively, the commenter proposed requiring the Enterprises to
report on all of their Plan activities and objectives quarterly, at
least in the final year of the three-year Plan, so that FHFA could
receive more robust information from the public as it considers the
Enterprises' proposed new Plans. Another policy advocacy organization
that advocated for all of the reports to be made public echoed this
recommendation.
After considering the comments, FHFA has concluded that it would be
beneficial for the public to have greater information about Enterprise
performance during the third year of the Enterprises' Plans in order to
be able to provide more informed input to FHFA on the Enterprises'
subsequent proposed Plans. Accordingly, Sec. 1282.66(d) of the final
rule provides that FHFA will make public certain narrative information
derived from the Enterprises' second quarter reports, omitting loan
purchase data as well as any confidential and proprietary data or
information, at a reasonable time after receiving the second quarter
reports in the third year of the Plans. Although this approach would
reveal some information about the Enterprises' progress on their Plans
during that evaluation year, FHFA has determined that risk to the
Enterprises would be mitigated by omitting data under the loan purchase
evaluation area. Providing the public with some information derived
from the second quarter reports could facilitate stronger public input
that could sharpen the Plans that will cover the next three years.

X. Paperwork Reduction Act

The final rule does not contain any information collection
requirement that would require the approval of OMB under the Paperwork
Reduction Act (44 U.S.C. 3501 et seq.). Therefore, FHFA has not
submitted any information to OMB for review.

XI. Regulatory Flexibility Act

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that
a regulation that has a significant economic impact on a substantial
number of small entities, small businesses, or small organizations must
include an initial regulatory flexibility analysis describing the
regulation's impact on small entities. Such an analysis need not be
undertaken if the agency has certified that the regulation will not
have a significant economic impact on a substantial number of small
entities. (5 U.S.C. 605(b)). FHFA has considered the impact of this
rule under the Regulatory Flexibility Act. The General Counsel of FHFA
certifies that this rule will not have a significant economic impact on
a substantial number of small entities because the rule applies to the
Enterprises, which are not small entities for purposes of the
Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 1282

Mortgages, Reporting and recordkeeping requirements.

Authority and Issuance

For the reasons stated in the preamble, under the authority of 12
U.S.C. 4501, 4502, 4511, 4513, 4526, and 4561-4566, FHFA amends part
1282 of subchapter E of 12 CFR chapter XII, as follows:

PART 1282--ENTERPRISE HOUSING GOALS AND MISSION

0
1. The authority citation for part 1282 continues to read as follows:

Authority: 12 U.S.C. 4501, 4502, 4511, 4513, 4526, 4561-4566.

0
2. In Sec. 1282.1(b), add the definitions of ``Additional Activity'',
``Agricultural worker'', ``Area of concentrated poverty'', ``Colonia'',
``Community development financial institution'', ``Evaluation
Guidance'', ``Federally insured credit union'', ``Federally recognized
Indian tribe'', ``High-needs rural population'', ``High-needs rural
region'', ``High opportunity area'', ``Indian area'', ``Insured
depository institution'', ``Lower Mississippi Delta'', ``Manufactured
home'', ``Manufactured housing community'', ``Middle Appalachia'',
``Mixed-income housing'', ``Persistent poverty county'', ``Regulatory
Activity'', ``Resident-owned manufactured housing community'',
``Residential economic diversity activity'', ``Rural area'', ``Small
financial institution'', ``Small multifamily rental property'',
``Statutory Activity'', and ``Underserved Markets Plan'', in
alphabetical order to read as follows:

[[Page 96293]]

Sec. 1282. 1 Definitions.

* * * * *
(b) * * *
Additional Activity, for purposes of subpart C of this part, means
an activity in an Enterprise's Underserved Markets Plan that is not a
Statutory Activity or Regulatory Activity.
Agricultural worker, for purposes of subpart C of this part, means
any person that meets the definition of an agricultural worker under a
federal, state, tribal or local program.
* * * * *
Area of concentrated poverty, for purposes of subpart C of this
part, means a census tract designated by HUD as a Qualified Census
Tract, pursuant to 26 U.S.C. 42(d)(5)(B)(ii), or as a Racially- or
Ethnically-Concentrated Area of Poverty, pursuant to 24 CFR 5.152,
during any year covered by an Underserved Markets Plan or in the year
prior to a Plan's effective date.
* * * * *
Colonia, for purposes of subpart C of this part, means an
identifiable community that meets the definition of a colonia under a
federal, State, tribal, or local program.
Community development financial institution, for purposes of
subpart C of this part, has the meaning in 12 CFR 1263.1.
* * * * *
Evaluation Guidance, for purposes of subpart C of this part, means
separate FHFA-prepared guidance that includes the information required
under this subpart, as well as additional guidance on the Underserved
Markets Plans, how the quantitative and qualitative assessments will be
conducted, the role of extra credit for extra-credit eligible
activities such as residential economic diversity, how final ratings
will be determined, and other matters as may be appropriate.
* * * * *
Federally insured credit union, for purposes of subpart C of this
part, has the meaning in 12 U.S.C. 1752(7).
Federally recognized Indian tribe, for purposes of subpart C of
this part, has the meaning in 25 CFR 83.1.
* * * * *
High-needs rural population, for purposes of subpart C of this
part, means any of the following populations provided the population is
located in a rural area:
(i) Members of a Federally recognized Indian tribe located in an
Indian area; or
(ii) Agricultural workers.
High-needs rural region, for purposes of subpart C of this part,
means any of the following regions provided the region is located in a
rural area:
(i) Middle Appalachia;
(ii) The Lower Mississippi Delta;
(iii) A colonia; or
(iv) A tract located in a persistent poverty county and not
included in Middle Appalachia, the Lower Mississippi Delta, or a
colonia.
High opportunity area, for purposes of subpart C of this part,
means:
(i) An area designated by HUD as a ``Difficult Development Area,''
pursuant to 26 U.S.C. 42(d)(5)(B)(iii), during any year covered by an
Underserved Markets Plan or in the year prior to an Underserved Markets
Plan's effective date, whose poverty rate is lower than the rate
specified by FHFA in the Evaluation Guidance; or
(ii) An area designated by a state or local Qualified Allocation
Plan as a high opportunity area and which meets a definition FHFA has
identified as eligible for duty to serve credit in the Evaluation
Guidance.
* * * * *
Indian area, for purposes of subpart C of this part, has the
meaning in 24 CFR 1000.10.
Insured depository institution, for purposes of subpart C of this
part, means an institution whose deposits are insured under the Federal
Deposit Insurance Act (12 U.S.C. 1811 et seq.).
* * * * *
Lower Mississippi Delta, for purposes of subpart C of this part,
means the Lower Mississippi Delta counties designated by Public Laws
100-460, 106-554, and 107-171, along with any future updates made by
Congress.
Manufactured home, for purposes of subpart C of this part, means a
manufactured home as defined in section 603(6) of the National
Manufactured Housing Construction and Safety Standards Act of 1974, as
amended, 42 U.S.C. 5401 et seq., and implementing regulations.
Manufactured housing community, for purposes of subpart C of this
part, means a tract of land under unified ownership and developed for
the purposes of providing individual rental spaces for the placement of
manufactured homes for residential purposes within its boundaries.
* * * * *
Middle Appalachia, for purposes of subpart C of this part, means
the ``central'' Appalachian subregion under the Appalachian Regional
Commission's subregional classification of Appalachia.
* * * * *
Mixed-income housing, for purposes of subpart C of this part, means
a multifamily property or development that may include or comprise
single-family units that serves very low-, low-, or moderate-income
families where:
(i) A minimum percentage of the units are unaffordable to low-
income families, or to families at higher income levels, as specified
in the Evaluation Guide; and
(ii) A minimum percentage of the units are affordable to low-income
families, or to families at lower income levels, as specified in the
Evaluation Guide.
* * * * *
Persistent poverty county, for purposes of subpart C of this part,
means a county in a rural area that has had 20 percent or more of its
population living in poverty over the past 30 years, as measured by the
most recent successive decennial censuses.
* * * * *
Regulatory Activity, for purposes of subpart C of this part, means
an activity in an Enterprise's Underserved Markets Plan that is
designated as a Regulatory Activity in Sec. Sec. 1282.33(c),
1282.34(d), or 1282.35(c).
* * * * *
Resident-owned manufactured housing community, for purposes of
subpart C of this part, means a manufactured housing community for
which the terms and conditions of residency, policies, operations and
management are controlled by at least 51 percent of the residents,
either directly or through an entity formed under the laws of the
state.
Residential economic diversity activity, for purposes of subpart C
of this part, means an eligible Enterprise activity, other than an
energy or water efficiency improvement activity or other activity that
FHFA determines to be ineligible, in connection with mortgages on:
(i) Affordable housing in a high opportunity area; or
(ii) Mixed-income housing in an area of concentrated poverty.
* * * * *
Rural area, for purposes of subpart C of this part, means:
(i) A census tract outside of a metropolitan statistical area as
designated by the Office of Management and Budget; or
(ii) A census tract in a metropolitan statistical area as
designated by the Office of Management and Budget that is outside of
the metropolitan statistical area's Urbanized Areas as designated by
the U.S. Department of Agriculture's (USDA) Rural-Urban Commuting Area
(RUCA) Code #1, and outside of tracts with a housing density of over 64
housing units per square mile for USDA's RUCA Code #2.
* * * * *
Small financial institution, for purposes of subpart C of this
part,

[[Page 96294]]

means a financial institution with less than $304 million in assets.
* * * * *
Small multifamily rental property, for purposes of subpart C of
this part, means any property of 5 to 50 rental units.
Statutory Activity, for purposes of subpart C of this part, means
an Enterprise activity relating to housing projects under the programs
set forth in 12 U.S.C. 4565(a)(1)(B) and Sec. 1282.34(c).
Underserved Markets Plan, for purposes of subpart C of this part,
means a plan prepared by an Enterprise describing the activities and
objectives it will undertake to meet its duty to serve each of the
three underserved markets.
* * * * *

0
3. Add subpart C to read as follows:

Subpart C--Duty to Serve Underserved Markets

Sec.
1282.31 General.
1282.32 Underserved Markets Plan.
1282.33 Manufactured housing market.
1282.34 Affordable housing preservation market.
1282.35 Rural markets.
1282.36 Evaluations, ratings, and Evaluation Guidance.
1282.37 General requirements for credit.
1282.38 General requirements for loan purchases.
1282.39 Special requirements for loan purchases.
1282.40 Failure to comply.
1282.41 Housing plans.

Sec. 1282.31 General.

(a) This subpart sets forth the Enterprise duty to serve three
underserved markets as required by section 1335 of the Safety and
Soundness Act (12 U.S.C. 4565). This subpart also establishes standards
and procedures for annually evaluating and rating Enterprise compliance
with the duty to serve underserved markets.
(b) Nothing in this subpart permits or requires an Enterprise to
engage in any activity that would otherwise be inconsistent with its
Charter Act or the Safety and Soundness Act.

Sec. 1282.32 Underserved Markets Plan.

(a) General. Each Enterprise must submit to FHFA an Underserved
Markets Plan describing the activities and objectives it will undertake
to meet its duty to serve each of the three underserved markets. Plan
activities and objectives may cover a single year or multiple years.
(b) Term of Plan. Each Enterprise's Plan must cover a period of
three years.
(c) Effective date of Plans. Where an underserved market in a Plan
receives a Non-Objection from FHFA by December 1 of the prior year, the
effective date for that underserved market in the Plan will be January
1 of the first evaluation year for which the Plan is applicable. Where
an underserved market in a Plan does not receive a Non-Objection from
FHFA by December 1 of the prior year, the effective date for that
underserved market in the Plan will be as determined by FHFA.
(d) Plan content.--(1) Consideration of minimum number of
activities. The Enterprises must consider and address in their Plans a
minimum number of Statutory Activities or Regulatory Activities for
each underserved market. The minimum number will be determined by FHFA
and stated in the Evaluation Guidance as provided for in Sec.
1282.36(d). An Enterprise will select the specific Statutory Activities
or Regulatory Activities to address in its Plan under this requirement.
For the activities selected by the Enterprise, the Enterprise must
address in its Plan either how it will undertake the activities and
related objectives, or the reasons why it will not undertake the
activities. The statutory programs in Sec. 1282.34(c)(5) and (c)(6)
are excluded for this purpose.
(2) Additional Activities. An Enterprise may also include in its
Plan Additional Activities eligible to serve an underserved market. For
the Additional Activities included by the Enterprise, the Enterprise
must address in its Plan how it will undertake the activities and
related objectives.
(3) Residential economic diversity activities. If an Enterprises
chooses to undertake a residential economic diversity activity for
extra credit under Sec. 1282.36(c)(3), the Enterprise must describe
the activity and related objectives in its Plan.
(e) Objectives. Each Statutory Activity, Regulatory Activity, and
Additional Activity in an Enterprise's Plan must comprise one or more
objectives, which are the specific action items that the Enterprises
will identify for each activity. Each objective must meet all of the
following requirements:
(1) Strategic. Directly or indirectly maintain or increase
liquidity to an underserved market;
(2) Measurable. Provide measurable benchmarks, which may include
numerical targets, that enable FHFA to determine whether the Enterprise
has achieved the objective;
(3) Realistic. Be calibrated so that the Enterprise has a
reasonable chance of meeting the objective with appropriate effort;
(4) Time-bound. Be subject to a specific timeframe for completion
by being tied to Plan calendar year evaluation periods; and
(5) Tied to analysis of market opportunities. Be based on
assessments and analyses of market opportunities in each underserved
market, taking into account safety and soundness considerations.
(f) Evaluation areas. Each Plan objective must meet at least one of
the evaluation areas set forth in Sec. 1282.36(b). An Enterprise must
designate in its Plan the one evaluation area under which each Plan
objective will be evaluated.
(g) Plan procedures.--(1) Submission of proposed Plans.--(i) First
proposed Plan. An Enterprise's first proposed Plan must be submitted to
FHFA within 90 days after FHFA posts the proposed Evaluation Guidance
on FHFA's Web site pursuant to Sec. 1282.36(d)(3).
(ii) Subsequent proposed Plans. For subsequent proposed Plans after
the first Plan, FHFA will provide timelines 300 days before the
termination date of the Plan in effect, or a later date if additional
time is necessary, for proposed Plan submission, public input periods,
and Non-Objection to an underserved market in a Plan. Unless otherwise
directed by FHFA, each Enterprise must submit a proposed Plan to FHFA
at least 210 days before the termination date of the Enterprise's Plan
in effect.
(2) Posting of proposed Plans. As soon as practical after an
Enterprise submits its proposed Plan to FHFA for review, FHFA will post
the proposed Plan on FHFA's Web site, with any confidential and
proprietary data and information omitted.
(3) Public input.--(i) For the first proposed Plans, the public
will have 60 days from the date the proposed Plans are posted on FHFA's
Web site to provide input on the proposed Plans.
(ii) The Enterprises' subsequent proposed Plans will be available
for public input pursuant to the timeframe and procedures established
by FHFA.
(4) Enterprise review. Each Enterprise may, in its discretion, make
revisions to its proposed Plan based on the public input.
(5) FHFA review.--(i) FHFA review of first proposed Plans. FHFA
will review each Enterprise's first proposed Plan and inform the
Enterprise of any FHFA comments on the proposed Plan within 60 days
from the end of the public input period on the proposed Plan, or such
additional time as may be necessary. The Enterprise must address FHFA's
comments, as appropriate, through revisions to its proposed Plan
pursuant to the timeframe and procedures established by FHFA.

[[Page 96295]]

(ii) FHFA review of subsequent proposed Plans. For subsequent
proposed Plans after the first proposed Plans, FHFA will establish a
timeframe and procedures for FHFA review, comments, and any required
Enterprise revisions.
(iii) Designation of Statutory Activity or Regulatory Activity.
FHFA may, in its discretion, designate in the Evaluation Guidance one
Statutory Activity or Regulatory Activity in each underserved market
that FHFA will significantly consider in determining whether to provide
a Non-Objection to that underserved market in a proposed Plan.
(iv) FHFA Non-Objections to underserved markets in a proposed Plan.
After FHFA is satisfied that all of its comments on an underserved
market in a proposed Plan have been addressed, FHFA will issue a Non-
Objection for that underserved market in the Plan.
(6) Effective date of an underserved market in a Plan. Where an
underserved market in a Plan receives a Non-Objection from FHFA by
December 1 of the prior year, the effective date for that underserved
market in the Plan will be January 1 of the first evaluation year for
which the Plan is applicable. Where an underserved market in a Plan
does not receive a Non-Objection from FHFA by December 1 of the prior
year, the effective date for that underserved market in the Plan will
be as determined by FHFA.
(7) Posting of an underserved market section in a Plan. As soon as
practicable after FHFA issues a Non-Objection to an underserved market
in a Plan, that section of the Plan will be posted on the Enterprise's
and FHFA's respective Web sites, with any confidential and proprietary
data and information omitted.
(h) Modification of a Plan. At any time after implementation of a
Plan, an Enterprise may request to modify its Plan during the three-
year term, subject to FHFA Non-Objection of the proposed modifications.
FHFA may also require an Enterprise to modify its Plan during the
three-year term. FHFA and the Enterprise may seek public input on
proposed modifications to a Plan if FHFA determines that public input
would assist its consideration of the proposed modifications. If a Plan
is modified, the modified Plan, with any confidential and proprietary
information and data omitted, will be posted on the Enterprise's and
FHFA's respective Web sites.

Sec. 1282.33 Manufactured housing market.

(a) Duty in general. Each Enterprise must develop loan products and
flexible underwriting guidelines to facilitate a secondary market for
eligible mortgages on manufactured homes for very low-, low-, and
moderate-income families. Enterprise activities under this section must
serve each such income group in the year for which the Enterprise is
evaluated and rated.
(b) Eligible activities. Enterprise activities eligible to be
included in an Underserved Markets Plan for the manufactured housing
market are activities that facilitate a secondary market for mortgages
on residential properties for very low-, low-, or moderate-income
families consisting of manufactured homes titled as real property or
personal property; and manufactured housing communities.
(c) Regulatory Activities. Enterprise activities related to the
following are eligible to receive duty to serve credit under the
manufactured housing market:
(1) Manufactured homes titled as real property. Mortgages on
manufactured homes titled as real property;
(2) Chattel. Loans on manufactured homes titled as personal
property, including both pilot and ongoing initiatives;
(3) Manufactured housing communities owned by a governmental
entity, nonprofit organization, or residents. Mortgages on manufactured
housing communities that are owned by a governmental unit or
instrumentality, a nonprofit organization, or residents; and
(4) Manufactured housing communities with certain pad lease
protections. Manufactured housing communities with pad leases that have
the following pad lease protections at a minimum, or manufactured
housing communities that are subject to state or local laws requiring
pad lease protections that equal or exceed the following pad lease
protections:
(i) One-year renewable lease term unless there is good cause for
nonrenewal;
(ii) Thirty-day written notice of rent increases;
(iii) Five-day grace period for rent payments and right to cure
defaults on rent payments;
(iv) Tenant has the right to sell the manufactured home without
having to first relocate it out of the community;
(v) Tenant has the right to sublease or assign the pad lease for
the unexpired term to the new buyer of the tenant's manufactured home
without any unreasonable restraint;
(vi) Tenant has the right to post ``For Sale'' signs;
(vii) Tenant has the right to sell the manufactured home in place
within a reasonable time period after eviction by the manufactured
housing community owner; and
(viii) Tenant has the right to receive at least 60 days advance
notice of a planned sale or closure of the manufactured housing
community.
(d) Additional Activities. An Enterprise may include in its Plan
other activities to serve very low-, low-, or moderate-income families
in the manufactured housing market consistent with paragraph (b) of
this section, subject to FHFA determination of whether the Additional
Activity is eligible to receive duty to serve credit.

Sec. 1282.34 Affordable housing preservation market.

(a) Duty in general. Each Enterprise must develop loan products
and flexible underwriting guidelines to facilitate a secondary market
to preserve housing affordable to very low-, low-, and moderate-income
families under eligible housing programs or activities. Enterprise
activities under this section must serve each such income group in the
year for which the Enterprise is evaluated and rated.
(b) Eligible activities. Enterprise activities eligible to be
included in an Underserved Markets Plan for the affordable housing
preservation market are activities that facilitate a secondary market
for mortgages on residential properties for very low-, low-, or
moderate-income families consisting of affordable rental housing
preservation and affordable homeownership preservation.
(c) Statutory Activities. Enterprise activities related to housing
projects under the following programs in the Safety and Soundness Act
(12 U.S.C. 4565(a)(1)(B)) are eligible to receive duty to serve credit
under the affordable housing preservation market:
(1) Section 8. The project-based and tenant-based rental assistance
housing programs under section 8 of the U.S. Housing Act of 1937, 42
U.S.C. 1437f;
(2) Section 236. The rental and cooperative housing program for
lower income families under section 236 of the National Housing Act, 12
U.S.C. 1715z-1;
(3) Section 221(d)(4). The housing program for moderate-income and
displaced families under section 221(d)(4) of the National Housing Act,
12 U.S.C. 1715l;
(4) Section 202. The supportive housing program for the elderly
under section 202 of the Housing Act of 1959, 12 U.S.C. 1701q;
(5) Section 811. The supportive housing program for persons with
disabilities under section 811 of the

[[Page 96296]]

Cranston-Gonzalez National Affordable Housing Act, 42 U.S.C. 8013;
(6) McKinney-Vento Homeless Assistance. Permanent supportive
housing projects subsidized under Title IV of the McKinney-Vento
Homeless Assistance Act, 42 U.S.C. 11361, et seq.;
(7) Section 515. The rural rental housing program under section 515
of the Housing Act of 1949, 42 U.S.C. 1485;
(8) Low-income housing tax credits. Low-income housing tax credits
under section 42 of the Internal Revenue Code of 1986, 26 U.S.C. 42;
and
(9) Other comparable state or local affordable housing programs.
Other comparable affordable housing programs administered by a state or
local government that preserve housing affordable to very low-, low-,
and moderate-income families. An Enterprise may include in its Plan
statutory programs pursuant to this paragraph (c)(9), subject to FHFA
determination that the program is comparable to one of the statutory
programs in this paragraph (c) in the way it provides subsidy and
preserves affordable housing for the income-eligible households.
(d) Regulatory Activities. Enterprise activities related to the
following are eligible to receive duty to serve credit under the
affordable housing preservation market:
(1) Financing of small multifamily rental properties. Financing of
small multifamily rental properties by a community development
financial institution, insured depository institution, or federally
insured credit union, where the entity's total assets are $10 billion
or less;
(2) Energy or water efficiency improvements on multifamily rental
properties. Energy or water efficiency improvements on multifamily
rental properties provided there are projections made based on credible
and generally accepted standards that the improvements financed by the
loan will reduce energy or water consumption by the tenant or the
property by at least 15 percent, and the energy or water savings
generated over an improvement's expected life will exceed the cost of
installation;
(3) Energy or water efficiency improvements on single-family, first
lien properties. Energy or water efficiency improvements on single-
family, first-lien properties, provided there are projections made
based on credible and generally accepted standards that the
improvements financed by the loan will reduce energy or water
consumption by the homeowner, the tenant, or the property by at least
15 percent, and the utility savings generated over an improvement's
expected life will exceed the cost of installation;
(4) Shared equity programs for affordable homeownership
preservation.--(i) Affordable homeownership preservation through one of
the following shared equity homeownership programs:
(A) Resale restriction programs administered by community land
trusts, other nonprofit organizations, or state or local governments or
instrumentalities; or
(B) Shared appreciation loan programs administered by community
land trusts, other nonprofit organizations, or state or local
governments or instrumentalities that may or may not partner with a
for-profit institution to invest in, originate, sell, or service shared
appreciation loans.
(ii) A program in paragraph (d)(4)(i) must:
(A) Provide homeownership opportunities to very low-, low-, or
moderate-income households;
(B) Utilize a ground lease, deed restriction, subordinate loan, or
similar legal mechanism that includes provisions stating that the
program will keep the home affordable for subsequent very low-, low-,
or moderate-income families, the affordability term is at least 30
years after recordation, a resale formula applies that limits the
homeowner's proceeds upon resale, and the program administrator or its
assignee has a preemptive option to purchase the homeownership unit
from the homeowner at resale; and
(C) Support homebuyers and homeowners to promote sustainable
homeownership, including reviewing and pre-approving refinances and
home equity lines of credit.
(5) HUD Choice Neighborhoods Initiative. The HUD Choice
Neighborhoods Initiative, as authorized by 42 U.S.C. 1437v;
(6) HUD Rental Assistance Demonstration program. The HUD Rental
Assistance Demonstration program, as authorized by 42 U.S.C.1437f note;
and
(7) Purchase or rehabilitation of certain distressed properties.
Lending programs for the purchase or rehabilitation by very low-, low-,
or moderate-income families, or by nonprofit organizations or local or
tribal governments serving such families, of homes eligible for short
sale, homes eligible for foreclosure sale, or properties that a lender
acquires as a result of foreclosure.
(e) Additional Activities. An Enterprise may include in its Plan
other activities to serve very low-, low-, or moderate-income families
in the affordable housing preservation market consistent with paragraph
(b) of this section, subject to FHFA determination of whether the
activities are eligible to receive duty to serve credit.

Sec. 1282.35 Rural markets.

(a) Duty in general. Each Enterprise must develop loan products and
flexible underwriting guidelines to facilitate a secondary market for
eligible mortgages on housing for very low-, low-, and moderate-income
families in rural areas. Enterprise activities under this section must
serve each such income group in the year for which the Enterprise is
evaluated and rated.
(b) Eligible activities. Enterprise activities eligible to be
included in an Underserved Markets Plan for the rural market are
activities that facilitate a secondary market for mortgages on
residential properties for very low-, low-, or moderate-income families
in rural areas.
(c) Regulatory Activities. Enterprise activities related to the
following are eligible to receive duty to serve credit under the rural
market:
(1) High-needs rural regions. Housing in high-needs rural regions;
(2) High-needs rural populations. Housing for high-needs rural
populations;
(3) Financing by small financial institutions of rural housing.
Financing by a small financial institution of housing in a rural area;
and
(4) Small multifamily rental properties in rural areas. Small
multifamily rental properties that are located in a rural area.
(d) Additional Activities. An Enterprise may include in its Plan
other activities to serve very low-, low-, or moderate-income families
in rural areas consistent with paragraph (b) of this section, subject
to FHFA determination of whether the activities are eligible to receive
duty to serve credit.

Sec. 1282.36 Evaluations, ratings, and Evaluation Guidance.

(a) Evaluation of compliance. In determining whether an Enterprise
has complied with the duty to serve each underserved market, FHFA will
annually evaluate and rate the Enterprise's duty to serve performance
based on the Enterprise's implementation of its Underserved Markets
Plan during the relevant evaluation year. FHFA's evaluation will be in
accordance with separate, FHFA-prepared Evaluation Guidance as provided
for in paragraph (d) of this section.
(b) Evaluation areas. As provided in Sec. 1282.32(f), an
Enterprise must specify

[[Page 96297]]

in its Plan the evaluation area under which each Plan objective will be
evaluated. FHFA will evaluate an Enterprise's performance of each of
its Plan objectives under one of the following four evaluation areas,
as designated by the Enterprise in its Plan:
(1) Outreach. The extent of the Enterprise's outreach to qualified
loan sellers and other market participants in each underserved market;
(2) Loan product. The Enterprise's development of loan products,
more flexible underwriting guidelines, and other innovative approaches
to providing financing in each underserved market;
(3) Loan purchase. The volume of loan purchases by the Enterprise
in each underserved market relative to the market opportunities
available to the Enterprise; and
(4) Investments and grants. The amount of the Enterprise's
investments and grants in projects that assist in meeting the needs of
each underserved market.
(c) Evaluation process. At the end of each evaluation year, FHFA
will evaluate each Enterprise's performance under its Plan based on
quantitative and qualitative assessments of the Enterprise's
accomplishment of the objectives for the activities under each
underserved market in its Plan. Following the quantitative and
qualitative assessments, FHFA may provide extra credit for extra
credit-eligible residential economic diversity activities in an
underserved market in a Plan, and for other extra credit-eligible
activities in an underserved market in a Plan as may be designated by
FHFA in the Evaluation Guidance.
(1) Quantitative assessment. FHFA will conduct a quantitative
assessment which will evaluate the level of an Enterprise's
accomplishment of each objective for each activity in an underserved
market in its Plan, based on the level of accomplishment needed for the
objectives in order to receive a passing rating for compliance with the
Duty to Serve an underserved market in a Plan, as established by FHFA
in the Evaluation Guidance. At the conclusion of the quantitative
assessment for an underserved market in a Plan, FHFA will determine
whether an Enterprise has passed or failed the required level of
accomplishment.
(2) Qualitative assessment. FHFA will conduct a qualitative
assessment which will evaluate the Enterprise's accomplishment of each
objective for each activity in an underserved market in its Plan, based
on the method and criteria established by FHFA in the Evaluation
Guidance, such as how skillfully an objective was implemented, the
impact of the objective, and such other criteria as FHFA may set forth
in the Evaluation Guidance.
(3) Extra credit-eligible activities. FHFA may provide extra credit
for extra credit-eligible residential economic diversity activities
included in an underserved market in a Plan, and for other extra
credit-eligible activities included in an underserved market in a Plan,
where such other activities are designated by FHFA in the Evaluation
Guidance. FHFA will conduct its assessment of an Enterprise's
accomplishment of activities that are eligible for extra credit based
on the method and criteria established by FHFA in the Evaluation
Guidance, such as how skillfully an objective was implemented, the
impact of the objective, and such other criteria as FHFA may set forth
in the Evaluation Guidance.
(4) Ratings.--(i) Assignment of ratings. Based on the quantitative,
qualitative and extra credit assessments, FHFA will assign a rating of
Exceeds, High Satisfactory, Low Satisfactory, Minimally Passing, or
Fails to the Enterprise's performance for each underserved market in
its Plan. A rating of Exceeds, High Satisfactory, Low Satisfactory, or
Minimally Passing will constitute compliance by the Enterprise with the
duty to serve that underserved market. A rating of Fails will
constitute noncompliance by the Enterprise with the duty to serve that
underserved market.
(ii) Ongoing Assessment of Evaluation and Rating Process. FHFA will
make such determinations as appropriate based on evaluation of the
program's parameters and operation, pursuant to the Evaluation
Guidance, regarding implementation of the evaluation and rating
process.
(d) Evaluation Guidance.--(1) Three-year term. FHFA will prepare
Evaluation Guidance for use by both Enterprises for a three-year term.
(2) Contents. The Evaluation Guidance will include the information
required under this subpart, as well as additional guidance on
Enterprise Plans, how the quantitative and qualitative assessments will
be conducted, the role of extra credit, how final ratings will be
determined, and other matters as may be appropriate.
(3) Timelines for Evaluation Guidance.--(i) For the first Plan.--
(A) FHFA will provide to the Enterprises the proposed Evaluation
Guidance for the first Plan within 30 days after the posting of this
subpart on FHFA's Web site. FHFA will post the proposed Evaluation
Guidance on FHFA's Web site as soon as practicable after providing it
to the Enterprises.
(B) The proposed Evaluation Guidance will be available for public
input for a period of 120 days following its posting on FHFA's Web
site.
(C) FHFA will provide the Evaluation Guidance to the Enterprises no
later than the time FHFA provides comments to the Enterprises on their
proposed Plans.
(ii) For subsequent Plans. FHFA will provide timelines for the
Evaluation Guidance for subsequent Plans after the first Plan,
including public input periods, 300 days before the termination date of
the Plan in effect, or a later date if additional time is necessary.
(4) Posting of Evaluation Guidance. The final Evaluation Guidance
will be posted on the Enterprises' and FHFA's respective Web sites as
soon as practicable after the Evaluation Guidance is finalized.
(5) Modification of Evaluation Guidance. From time to time, FHFA
may modify the Evaluation Guidance prior to or during the Evaluation
Guidance's three-year term. FHFA may seek public input on proposed
modifications to the Evaluation Guidance if FHFA determines that public
input would assist its consideration of the proposed modifications.
Modified Evaluation Guidance will be effective on January 1 of the year
after the modified Evaluation Guidance is posted. FHFA will post the
modified Evaluation Guidance on FHFA's Web site as soon as practicable
after modified.

Sec. 1282.37 General requirements for credit.

(a) General. FHFA will determine whether an activity included in an
Enterprise's Underserved Markets Plan will receive duty to serve credit
or extra credit under an underserved market in the Plan. In this
determination, FHFA will consider whether the activity facilitates a
secondary market for financing mortgages: On manufactured homes for
very low-, low-, and moderate-income families; to preserve housing
affordable to very low-, low-, and moderate-income families; and on
housing for very low-, low-, and moderate-income families in rural
areas. If FHFA determines that an activity will receive duty to serve
credit or extra credit under an underserved market in the Plan, the
activity will receive such credit under the relevant evaluation area
for each underserved market it serves.
(b) No credit under any evaluation area. Enterprise activities
related to the following are not eligible to receive duty to serve
credit under any evaluation area under an underserved market, even

[[Page 96298]]

if the activity otherwise would receive credit under any other section
of this subpart, except as provided in this section:
(1) Contributions to the Housing Trust Fund (12 U.S.C. 4568) and
the Capital Magnet Fund (12 U.S.C. 4569), and mortgage purchases funded
with such grant amounts;
(2) HOEPA mortgages;
(3) Subordinate liens on multifamily properties, except for
subordinate liens originated for energy or water efficiency
improvements on multifamily rental properties that meet the
requirements in Sec. 1282.34(d)(2);
(4) Subordinate liens on single-family properties, except for
shared appreciation loans that satisfy all of the requirements in Sec.
1282.34(d)(4) of this part;
(5) Low-Income Housing Tax Credit equity investments in a property,
except where the property is located in a rural area;
(6) Permanent construction take-out loans and Additional Activities
under the affordable housing preservation market, except as provided in
paragraph (c) of this section; and
(7) Any combination of factors in paragraphs (b)(1) through (b)(6)
of this section.
(c) Credit for certain permanent construction take-out loans and
Additional Activities under the affordable housing preservation market.
Enterprise activities related to permanent construction take-out loans
and Additional Activities under the affordable housing preservation
market are eligible for duty to serve credit, provided the following
requirements are met, as applicable:
(1) Permanent construction take-out loans.--(i) The permanent
construction take-out loans preserve existing subsidies on affordable
housing with regulatory periods of required affordability that are at
least as restrictive as the longest affordability restriction
applicable to the subsidy or subsidies being preserved; or
(ii) The permanent construction take-out loans are for housing
developed under state or local inclusionary zoning, real estate tax
abatement, or loan programs, where the property owner has agreed to
restrict a portion of the units for occupancy by very low-, low-, or
moderate-income families, and to restrict the rents that can be charged
for those units at affordable rents to those populations, or where the
property is developed for a shared equity program that meets the
requirements under Sec. 1282.34(d)(4), and where there is a regulatory
agreement, recorded use restriction, or deed restriction in place that
maintains affordability for the term defined by the state or local
program.
(2) Additional Activities. Additional Activities that either:
(i) Involve preserving existing subsidy where the term of
affordability required for the subsidy is followed, or where there is a
deed restriction for affordability for the life of the loan; or
(ii) Involve preserving the affordability of properties in
conjunction with state or local inclusionary zoning, real estate tax
abatement, or loan programs, where a regulatory agreement, recorded use
restriction, or deed restriction maintains affordability of a portion
of the property's units for the term defined by the state or local
program.
(d) No credit under loan purchase evaluation area. The following
activities are not eligible to receive duty to serve credit under the
loan purchase evaluation area, even if the activity otherwise would
receive duty to serve credit under Sec. 1282.38:
(1) Purchases of mortgages to the extent they finance any dwelling
units that are secondary residences;
(2) Single-family refinancing mortgages that result from conversion
of balloon notes to fully amortizing notes, if the Enterprise already
owns or has an interest in the balloon note at the time conversion
occurs;
(3) Purchases of mortgages or interests in mortgages that
previously received credit under any underserved market within the five
years immediately preceding the current performance year;
(4) Purchases of mortgages where the property or any units within
the property have not been approved for occupancy;
(5) Any interests in mortgages that FHFA determines will not be
treated as interests in mortgages;
(6) Purchases of state and local government housing bonds except as
provided in Sec. 1282.39(h); and
(7) Any combination of factors in paragraphs (d)(1) through (d)(6)
of this section.
(e) FHFA review of activities or objectives. FHFA may determine
whether and how any activity or objective will receive duty to serve
credit under an underserved market in a Plan, including treatment of
missing data. FHFA will notify each Enterprise in writing of any
determination regarding the treatment of any activity or objective.
FHFA will make any such determinations available to the public on
FHFA's Web site.
(f) The year in which an activity or objective will receive credit.
An activity or objective that FHFA determines will receive duty to
serve credit under an underserved market in a Plan will receive such
credit in the year in which the activity or objective is completed.
FHFA may determine that credit is appropriate for an activity or
objective in which an Enterprise engages, but does not complete, in a
particular year, except that activities or objectives under the loan
purchase evaluation area will receive credit in the year in which the
Enterprise purchased the mortgage.
(g) Credit under one evaluation area. An activity or objective will
receive duty to serve credit under only one evaluation area in a
particular underserved market.
(h) Credit under multiple underserved markets. An activity or
objective, including financing of dwelling units by an Enterprise's
mortgage purchase, will receive duty to serve credit under each
underserved market for which the activity or objective qualifies in
that year.

Sec. 1282.38 General requirements for loan purchases.

(a) General. This section applies to Enterprise mortgage purchases
that may receive duty to serve credit under the loan purchase
evaluation area for a particular underserved market in a Plan. Only
dwelling units securing a mortgage purchased by the Enterprise in that
year and not specifically excluded under Sec. 1282.37(b) and (d) may
receive credit.
(b) Counting dwelling units. Performance under the loan purchase
evaluation area will be measured by counting dwelling units affordable
to very low-, low-, and moderate-income families.
(c) Credit for owner-occupied units.--(1) Mortgage purchases
financing owner-occupied single-family properties will be evaluated
based on the income of the mortgagor(s) and the area median income at
the time the mortgage was originated. To determine whether mortgages
may receive duty to serve credit under a particular family income
level, i.e., very low-, low-, or moderate-income, the income of the
mortgagor(s) is compared to the median income for the area at the time
the mortgage was originated, using the appropriate percentage factor
provided under Sec. 1282.17.
(2) Mortgage purchases financing owner-occupied single-family
properties for which the income of the mortgagor(s) is not available
will not receive duty to serve credit under the loan purchase
evaluation area.
(d) Credit for rental units.--(1) Use of rent. For Enterprise
mortgage purchases financing single-family rental units and multifamily
rental units, affordability is determined based on rent and whether

[[Page 96299]]

the rent is affordable to the income groups targeted by the duty to
serve. A rent is affordable if the rent does not exceed the maximum
levels as provided in Sec. 1282.19.
(2) Affordability of rents based on housing program requirements.
Where a multifamily property is subject to an affordability restriction
under a housing program that establishes the maximum permitted income
level for a tenant or a prospective tenant or the maximum permitted
rent, the affordability of units in the property may be determined
based on the maximum permitted income level or maximum permitted rent
established under such housing program for those units. If using
income, the maximum income level must be no greater than the maximum
income level for each income group targeted by the duty to serve,
adjusted for family or unit size as provided in Sec. 1282.17 or Sec.
1282.18, as appropriate. If using rent, the maximum rent level must be
no greater than the maximum rent level for each income group targeted
by the duty to serve, adjusted for unit size as provided in Sec.
1282.19.
(3) Unoccupied units. Anticipated rent for unoccupied units may be
the market rent for similar units in the neighborhood as determined by
the lender or appraiser for underwriting purposes. A unit in a
multifamily property that is unoccupied because it is being used as a
model unit or rental office may receive duty to serve credit only if
the Enterprise determines that the number of such units is reasonable
and minimal considering the size of the multifamily property.
(4) Timeliness of information. In evaluating affordability for
single-family rental properties, an Enterprise must use tenant income
and area median income available at the time the mortgage was
originated. For multifamily rental properties, the Enterprise must use
tenant income and area median income available at the time the mortgage
was acquired.
(e) Missing data or information for rental units.--(1) When
calculating unit affordability, rental units for which bedroom data are
missing will be considered efficiencies.
(2) When an Enterprise lacks sufficient information to determine
whether a rental unit in a single-family or multifamily property
securing a mortgage purchased by the Enterprise receives duty to serve
credit under the loan purchase evaluation area because rental data are
not available, the Enterprise's performance with respect to such unit
may be evaluated using estimated affordability information, except that
an Enterprise may not estimate affordability of rental units for
purposes of receiving extra credit for residential economic diversity
activities. The estimated affordability information is calculated by
multiplying the number of rental units with missing affordability
information in properties securing the mortgages purchased by the
Enterprise in each census tract by the percentage of all moderate-
income rental dwelling units in the respective tracts, as determined by
FHFA.
(f) Affordability of manufactured housing communities. For an
Enterprise purchase of a blanket loan on a manufactured housing
community, unless otherwise determined by FHFA, the affordability of
the homes in the community shall be determined using one of the
methodologies in paragraphs (f)(1) or (f)(2) of this section, as
applicable, except that for purposes of determining extra credit for
residential economic diversity activities or objectives, the
methodology in paragraph (f)(2) of this section may not be used.
(1) Methodology for government-, nonprofit- or resident-owned
manufactured housing communities. For a manufactured housing community
owned by a government unit or instrumentality, a nonprofit
organization, or the residents, if laws or regulations governing the
affordability of the community, or the community's or ownership
entity's founding, chartering, governing, or financing documents,
require that a certain number or percentage of the community's homes be
affordable consistent with paragraph (d)(1) of this section, then any
homes subject to such affordability restriction are treated as
affordable.
(2) Census tract methodology for any type of manufactured housing
community. For any type of manufactured housing community, except for
purposes of determining extra credit for residential economic diversity
activities or objectives, the affordability of the homes in the
community is determined as follows:
(i) If the median income of the census tract in which the
manufactured housing community is located is less than or equal to the
area median income, then all homes in the community are treated as
affordable;
(ii) If the median income of the census tract in which the
manufactured housing community is located exceeds the area median
income, then the number of homes that are treated as affordable is
determined by dividing the area median income by the median income of
the census tract in which the community is located and multiplying the
resulting ratio by the total number of homes in the community.
(g) Application of median income.--(1) To determine an area's
median income under Sec. Sec. 1282.17 through 1282.19 and the
definitions in Sec. 1282.1, the area is:
(i) The metropolitan area, if the property which is the subject of
the mortgage is in a metropolitan area; and
(ii) In all other areas, the county in which the property is
located, except that where the State non-metropolitan median income is
higher than the county's median income, the area is the State non-
metropolitan area.
(2) When an Enterprise cannot precisely determine whether a
mortgage is on dwelling unit(s) located in one area, the Enterprise
must determine the median income for the split area in the manner
prescribed by the Federal Financial Institutions Examination Council
for reporting under the Home Mortgage Disclosure Act (12 U.S.C. 2801 et
seq.), if the Enterprise can determine that the mortgage is on dwelling
unit(s) located in:
(i) A census tract; or
(ii) A census place code.
(h) Newly available data. When an Enterprise uses data to determine
whether a dwelling unit may receive duty to serve credit under the loan
purchase evaluation area and new data is released after the start of a
calendar quarter, the Enterprise need not use the new data until the
start of the following quarter.

Sec. 1282.39 Special requirements for loan purchases.

(a) General. Subject to FHFA's determination of whether an activity
or objective will receive duty to serve credit under a particular
underserved market, the activities or objectives identified in this
section will be treated as mortgage purchases as described and receive
credit under the loan purchase evaluation area. An activity or
objective that is covered by more than one paragraph below must satisfy
the requirements of each such paragraph.
(b) Credit enhancements.--(1) Dwelling units financed under a
credit enhancement entered into by an Enterprise will be treated as
mortgage purchases only when:
(i) The Enterprise provides a specific contractual obligation to
ensure timely payment of amounts due under a mortgage or mortgages
financed by the issuance of housing bonds (such bonds may be issued by
any entity, including a State or local housing finance agency); and
(ii) The Enterprise assumes a credit risk in the transaction
substantially

[[Page 96300]]

equivalent to the risk that would have been assumed by the Enterprise
if it had securitized the mortgages financed by such bonds.
(2) When an Enterprise provides a specific contractual obligation
to ensure timely payment of amounts due under any mortgage originally
insured by a public purpose mortgage insurance entity or fund, the
Enterprise may, on a case-by-case basis, seek approval from the
Director for such transactions to receive credit under the loan
purchase evaluation area for a particular underserved market.
(c) Risk-sharing. Mortgages purchased under risk-sharing
arrangements between an Enterprise and any federal agency under which
the Enterprise is responsible for a substantial amount of the risk will
be treated as mortgage purchases.
(d) Participations. Participations purchased by an Enterprise will
be treated as mortgage purchases only when the Enterprise's
participation in the mortgage is 50 percent or more.
(e) Cooperative housing and condominiums.--(1) The purchase of a
mortgage on a cooperative housing unit (``a share loan'') or a mortgage
on a condominium unit will be treated as a mortgage purchase. Such a
purchase will receive duty to serve credit in the same manner as a
mortgage purchase of single-family owner-occupied units, i.e.,
affordability is based on the income of the mortgagor(s).
(2) The purchase of a blanket mortgage on a cooperative building or
a mortgage on a condominium project will be treated as a mortgage
purchase. The purchase of a blanket mortgage on a cooperative building
will receive duty to serve credit in the same manner as a mortgage
purchase of a multifamily rental property, except that affordability
must be determined based solely on the comparable market rents used in
underwriting the blanket loan. If the underwriting rents are not
available, the loan will not be treated as a mortgage purchase. The
purchase of a mortgage on a condominium project will receive duty to
serve credit in the same manner as a mortgage purchase of a multifamily
rental property.
(3) Where an Enterprise purchases both a blanket mortgage on a
cooperative building and share loans for units in the same building,
both the mortgage on the cooperative building and the share loans will
be treated as mortgage purchases. Where an Enterprise purchases both a
mortgage on a condominium project and mortgages on individual dwelling
units in the same project, both the mortgage on the condominium project
and the mortgages on individual dwelling units will be treated as
mortgage purchases.
(f) Seasoned mortgages. An Enterprise's purchase of a seasoned
mortgage will be treated as a mortgage purchase.
(g) Purchase of refinancing mortgages. The purchase of a
refinancing mortgage by an Enterprise will be treated as a mortgage
purchase only if the refinancing is an arms-length transaction that is
borrower-driven.
(h) Mortgage revenue bonds. The purchase or guarantee by an
Enterprise of a mortgage revenue bond issued by a state or local
housing finance agency will be treated as a purchase of the underlying
mortgages only to the extent the Enterprise has sufficient information
to determine whether the underlying mortgages or mortgage-backed
securities serve the income groups targeted by the duty to serve.
(i) Seller dissolution option.--(1) Mortgages acquired through
transactions involving seller dissolution options will be treated as
mortgage purchases only when:
(i) The terms of the transaction provide for a lockout period that
prohibits the exercise of the dissolution option for at least one year
from the date on which the transaction was entered into by the
Enterprise and the seller of the mortgages; and
(ii) The transaction is not dissolved during the one-year minimum
lockout period.
(2) FHFA may grant an exception to the one-year minimum lockout
period described in paragraphs (i)(1)(i) and (i)(1)(ii) of this
section, in response to a written request from an Enterprise, if FHFA
determines that the transaction furthers the purposes of the
Enterprise's Charter Act and the Safety and Soundness Act.
(3) For purposes of paragraph (i) of this section, ``seller
dissolution option'' means an option for a seller of mortgages to the
Enterprises to dissolve or otherwise cancel a mortgage purchase
agreement or loan sale.

Sec. 1282.40 Failure to comply.

If the Director determines that an Enterprise has not complied
with, or there is a substantial probability that an Enterprise will not
comply with, the duty to serve a particular underserved market in a
given year and the Director determines that such compliance is or was
feasible, the Director will follow the procedures in 12 U.S.C. 4566(b).

Sec. 1282.41 Housing plans.

(a) General. If the Director determines that an Enterprise did not
comply with, or there is a substantial probability that an Enterprise
will not comply with, the duty to serve a particular underserved market
in a given year, the Director may require the Enterprise to submit a
housing plan for approval by the Director.
(b) Nature of housing plan. If the Director requires a housing
plan, the housing plan must:
(1) Be feasible;
(2) Be sufficiently specific to enable the Director to monitor
compliance periodically;
(3) Describe the specific actions that the Enterprise will take:
(i) To comply with the duty to serve a particular underserved
market for the next calendar year; or
(ii) To make such improvements and changes in its operations as are
reasonable in the remainder of the year, if the Director determines
that there is a substantial probability that the Enterprise will fail
to comply with the duty to serve a particular underserved market in
such year; and
(4) Address any additional matters relevant to the housing plan as
required, in writing, by the Director.
(c) Deadline for submission. The Enterprise must submit the housing
plan to the Director within 45 days after issuance of a notice
requiring the Enterprise to submit a housing plan. The Director may
extend the deadline for submission of a housing plan, in writing and
for a time certain, to the extent the Director determines an extension
is necessary.
(d) Review of housing plans. The Director will review and approve
or disapprove housing plans in accordance with 12 U.S.C. 4566(c)(4) and
(c)(5).
(e) Resubmission. If the Director disapproves an initial housing
plan submitted by an Enterprise, the Enterprise must submit an amended
housing plan acceptable to the Director not later than 15 days after
the Director's disapproval of the initial housing plan. The Director
may extend the deadline if the Director determines that an extension is
in the public interest. If the amended housing plan is not acceptable
to the Director, the Director may afford the Enterprise 15 days to
submit a new housing plan.

0
4. Add Sec. 1282.66 to subpart D to read as follows:

Sec. 1282.66 Enterprise reports on duty to serve.

(a) First and third quarter reports. Each Enterprise must submit to
FHFA a first and third quarter report on its activities and objectives
under each underserved market in its Underserved Markets Plan for the
loan purchase evaluation area. The report must

[[Page 96301]]

include detailed year-to-date information on the Enterprise's progress
towards meeting the activities and objectives in its Plan. The
Enterprise must submit the first and third quarter reports to FHFA
within 60 days of the end of the respective quarter.
(b) Second quarter report. Each Enterprise must submit to FHFA a
second quarter report on all of the activities and objectives under
each underserved market in its Underserved Markets Plan. The report
must include detailed year-to-date information on the Enterprise's
progress towards meeting the activities and objectives under each
underserved market in its Plan, and contain narrative and summary
statistical information for the Plan objectives, supported by
appropriate transaction level detail. The Enterprise must submit the
second quarter report to FHFA within 60 days of the end of the second
quarter.
(c) Annual report. To comply with the requirements in sections
309(n) of the Fannie Mae Charter Act and 307(f) of the Freddie Mac Act
and for purposes of FHFA's Annual Housing Report to Congress, each
Enterprise must submit to FHFA an annual report on all of the
activities and objectives under each underserved market in its
Underserved Markets Plan no later than 75 days after the end of each
calendar year. For each underserved market, the Enterprise's annual
report must include, at a minimum: A description of the Enterprise's
market opportunities for loan purchases during the evaluation year to
the extent data is available; the volume of qualifying loans purchased
by the Enterprise during the evaluation year; a comparison of the
Enterprise's loan purchases with its loan purchases in prior years; a
comparison of market opportunities with the size of the relevant
markets in the past, to the extent data is available; and narrative and
summary statistical information for the Plan objectives, supported by
appropriate transaction level data.
(d) Public disclosure of information from reports. FHFA will make
public certain information from the first, second, and third quarter
reports at a reasonable time after the end of the calendar year for
which they apply, with any confidential and proprietary information and
data omitted. FHFA will make public certain information from the annual
reports at a reasonable time after receiving them from the Enterprises,
with any confidential and proprietary information and data omitted. In
the third year of the Underserved Markets Plans, FHFA will make public
certain narrative information from the year's second quarter report,
excluding data under the loan purchase evaluation area and any
confidential and proprietary information and data, at a reasonable time
after receiving it within the calendar year.

Dated: December 12, 2016.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2016-30284 Filed 12-28-16; 8:45 am]
BILLING CODE 8070-01-P