[Federal Register Volume 82, Number 184 (Monday, September 25, 2017)]
[Rules and Regulations]
[Pages 44518-44519]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-20474]



[[Page 44518]]

=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 570

[Docket No. FR-5767-N-06]
RIN 2506-AC35


Section 108 Loan Guarantee Program: Announcement of Fee To Cover 
Credit Subsidy Costs

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

ACTION: Notification of fees.

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

SUMMARY: This document announces the fee that HUD will collect from 
borrowers of loans guaranteed under HUD's Section 108 Loan Guarantee 
Program (Section 108 Program) to offset the credit subsidy costs of the 
guaranteed loans pursuant to commitments awarded in FY 2018.

DATES: Applicability Date: October 25, 2017.

FOR FURTHER INFORMATION CONTACT: Paul Webster, Director, Financial 
Management Division, Office of Block Grant Assistance, Office of 
Community Planning and Development, Department of Housing and Urban 
Development, 451 7th Street SW., Room 7180, Washington, DC 20410; 
telephone number 202-402-4563 (this is not a toll-free number). 
Individuals with speech or hearing impairments may access this number 
through TTY by calling the toll-free Federal Relay Service at 800-877-
8339. FAX inquiries (but not comments) may be sent to Mr. Webster at 
202-708-1798 (this is not a toll-free number).

SUPPLEMENTARY INFORMATION: 

I. Background

    The Transportation, Housing and Urban Development, and Related 
Agencies Appropriations Act, 2015 (division K of Pub. L. 113-235, 
approved December 16, 2014) (2015 Appropriations Act) provided that 
``the Secretary shall collect fees from borrowers . . . to result in a 
credit subsidy cost of zero for guaranteeing'' Section 108 loans. 
Identical language was continued or included in the Department's 
continuing resolutions and appropriations acts authorizing HUD to issue 
Section 108 loan guarantees during fiscal years 2016 and 2017 (Pub. L. 
114-53, 114-113, and 115-31). Section 101(a) of the Continuing 
Appropriations Act, 2018 (Division D of Pub. L. 115-56, approved 
September 8, 2017) includes the costs of HUD loan guarantees generally 
in its continuation of fiscal year 2017 programs. Additionally, the 
Senate appropriations bill under consideration (S. 1655) and the House 
omnibus bill (H.R. 3354) have identical language regarding the fees and 
credit subsidy cost for the Section 108 Program.
    On November 3, 2015, HUD published a final rule (80 FR 67626) that 
amended the Section 108 Program regulations at 24 CFR part 570 to 
establish additional procedures, including procedures for announcing 
the amount of the fee each fiscal year when HUD is required to offset 
the credit subsidy costs to the Federal government to guarantee Section 
108 loans. For fiscal years 2016 and 2017, HUD issued notices to set 
the fees.\1\
---------------------------------------------------------------------------

    \1\ 80 FR 67634 (November 3, 2015) and 81 FR 68297 (October 4, 
2016), respectively.
---------------------------------------------------------------------------

II. FY 2018 Fee: 2.365 Percent of the Principal Amount of the Loan

    This document sets the fee for Section 108 loan disbursements under 
loan guarantee commitments awarded for FY 2018 at 2.365 percent of the 
principal amount of the loan. HUD will collect this fee from borrowers 
of loans guaranteed under the Section 108 Program to offset the credit 
subsidy costs of the guaranteed loans pursuant to commitments awarded 
in FY 2018.
    For this fee notice, HUD is not changing the underlying assumptions 
or creating new considerations for borrowers. The calculation of the FY 
2018 fee uses the same fee calculation model as the FY 2016 and FY 2017 
final notices, but incorporates updated information regarding the 
composition of the Section 108 portfolio and the timing of the 
estimated future cash flows for defaults and recoveries. The 
calculation of the fee is also affected by the discount rates required 
to be used by HUD when calculating the present value of the future cash 
flows as part of the Federal budget process.
    As described in 24 CFR 570.712(b), HUD's credit subsidy calculation 
is based on the amount required to reduce the credit subsidy cost to 
the Federal government associated with making a Section 108 loan 
guarantee to the amount established by applicable appropriation acts. 
As a result, HUD's credit subsidy cost calculations incorporated 
assumptions based on: (i) Data on default frequency for municipal debt 
where such debt is comparable to loans in the Section 108 loan 
portfolio; (ii) data on recovery rates on collateral security for 
comparable municipal debt; (iii) the expected composition of the 
Section 108 portfolio by end users of the guaranteed loan funds (e.g., 
third party borrowers and public entities); and (iv) other factors that 
HUD determined were relevant to this calculation (e.g., assumptions as 
to loan disbursement and repayment patterns).
    Taking these factors into consideration, HUD determined that the 
fee for disbursements made under loan guarantee commitments awarded in 
FY 2018 will be 2.365 percent, which will be applied only at the time 
of loan disbursements. Note that future notices may provide for a 
combination of up-front and periodic fees for loan guarantee 
commitments awarded in future fiscal years but, if so, will provide the 
public an opportunity to comment if appropriate under 24 CFR 
570.712(b)(2).
    The expected cost of a Section 108 loan guarantee is difficult to 
estimate using historical program data because there have been no 
defaults in the history of the program that required HUD to invoke its 
full faith and credit guarantee or use the credit subsidy reserved each 
year for future losses.\2\ This is due to a variety of factors, 
including the availability of Community Development Block Grant (CDBG) 
funds as security for HUD's guarantee as provided in 24 CFR 570.705(b). 
As authorized by Section 108 of the Housing and Community Development 
Act of 1974, as amended (42 U.S.C. 5308), borrowers may make payments 
on Section 108 loans using CDBG grant funds. Borrowers may also make 
Section 108 loan payments from other anticipated sources but continue 
to have CDBG funds available should they encounter shortfalls in the 
anticipated repayment source. Despite the program's history of no 
defaults, federal credit budgeting principles require that the 
availability of CDBG funds to repay the guaranteed loans cannot be 
assumed in the development of the credit subsidy cost estimate (see 80 
FR 67629, November 3, 2015). Thus, the estimate must incorporate the 
risk that alternative sources are used to repay the guaranteed loan in 
lieu of CDBG funds, and that those sources may be insufficient. Based 
on the rate that CDBG funds are used annually for repayment of loan 
guarantees, HUD's calculation of the credit subsidy cost must take into 
account the possibility of future defaults if those CDBG funds were not 
available. The fee of 2.365 percent of the principal amount of the loan 
will offset the expected cost to the government due to default, 
financing costs, and other relevant factors. To arrive at this measure, 
HUD analyzed data on comparable municipal debt over

[[Page 44519]]

an extended 16 to 23-year period. The estimated rate is based on the 
default and recovery rates for general purpose municipal debt and 
industrial development bonds. The cumulative default rates on 
industrial development bonds (14.62 percent) were higher than the 
default rates on general purpose municipal debt (0.25 percent) during 
the period from which the data were taken. (The recovery rates for 
industrial development bonds and general purpose debt were 74.76 and 
90.27 percent, respectively.) These two subsectors of municipal debt 
were chosen because their purposes and loan terms most closely resemble 
those of Section 108 guaranteed loans.
---------------------------------------------------------------------------

    \2\ Department of Housing and Urban Development, Study of HUD's 
Section 108 Loan Guarantee Program, (prepared by Econometrica, Inc. 
and The Urban Institute), September 2012.
---------------------------------------------------------------------------

    In this regard, Section 108 guaranteed loans can be broken down 
into two categories: (1) Loans that finance public infrastructure and 
activities to support subsidized housing (other than financing new 
construction) and (2) other development projects (e.g., retail, 
commercial, industrial). The 2.365 percent fee was derived by weighting 
the default and recovery data for general purpose municipal debt and 
the data for industrial development bonds according to the expected 
composition of the Section 108 portfolio by corresponding project type. 
Based on the dollar amount of Section 108 loan guarantee commitments 
awarded during the period from FY 2012 through FY 2016, HUD expects 
that 30 percent of the Section 108 portfolio will be similar to general 
purpose municipal debt and 70 percent of the portfolio will be similar 
to industrial development bonds. In setting the fee at 2.365 percent of 
the principal amount of the guaranteed loan, HUD expects that the 
amount generated will fully offset the cost to the Federal government 
associated with making guarantee commitments awarded in FY 2018. Note 
that the FY 2018 fee represents a 0.225 percent decrease from the FY 
2017 fee of 2.59 percent. This is due primarily to updated loan 
repayment patterns and discount rates used in calculating the present 
value of cash flows. These are variables that ordinarily are modified 
in the credit subsidy calculation.
    This document establishes a rate that does not constitute a 
development decision that affects the physical condition of specific 
project areas or building sites. Accordingly, under 24 CFR 50.19(c)(6), 
this document is categorically excluded from environmental review under 
the National Environmental Policy Act of 1969 (42 U.S.C. 4321).

    Dated: September 12, 2017.
Neal Rackleff,
Assistant Secretary for Community Planning and Development.
[FR Doc. 2017-20474 Filed 9-22-17; 8:45 am]
BILLING CODE 4210-67-P