[Federal Register Volume 84, Number 141 (Tuesday, July 23, 2019)]
[Rules and Regulations]
[Pages 35299-35301]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15627]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 570

[Docket No. FR-6167-N-01]


Section 108 Loan Guarantee Program: Announcement of Fee To Cover 
Credit Subsidy Costs for FY 2020

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

ACTION: Announcement of fee.

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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 Fiscal Year 2020.

DATES: Applicability Date: October 1, 2019.

FOR FURTHER INFORMATION CONTACT: Paul Webster, Director, Financial 
Management Division, Office of Block Grant Assistance, Office of 
Community Planning and Development, U.S.

[[Page 35300]]

Department of Housing and Urban Development, 451 7th Street SW, Room 
7282, 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 (FYs) 2016, 2017, 2018, 
and 2019. The Fiscal Year (FY) 2020 HUD appropriations bill under 
consideration in the House of Representatives (H.R. 3163) also has 
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 FYs 2016, 2017, 2018, and 2019, HUD published 
notifications to set the fees.\1\
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    \1\ 80 FR 67634 (November 3, 2015), 81 FR 68297 (October 4, 
2016), 82 FR 44518 (September 25, 2017), and 83 FR 50257 (October 5, 
2018), respectively.
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II. FY 2020 Fee: 2.00 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 2020 at 2.00 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 2020. For this fee announcement, HUD is not changing the 
underlying assumptions or creating new considerations for borrowers. 
The calculation of the FY 2020 fee uses a similar calculation model as 
the FY 2016, FY 2017, FY 2018, and FY 2019 fee notifications, 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: (1) Data on default frequency for municipal debt 
where such debt is comparable to loans in the Section 108 loan 
portfolio; (2) data on recovery rates on collateral security for 
comparable municipal debt; (3) 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 (4) 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 2020 will be 2.00 percent, which will be applied only at the time of 
loan disbursements. Note that future notifications may provide for a 
combination of upfront 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 
acknowledge the possibility of future defaults if those CDBG funds were 
not available. The fee of 2.00 percent of the principal amount of the 
loan will offset the expected cost to the Federal Government due to 
default, financing costs, and other relevant factors. To arrive at this 
measure, HUD analyzed data on comparable municipal debt over an 
extended 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 were higher than the default rates on general purpose 
municipal debt during the period from which the data were taken. These 
two subsectors of municipal debt were chosen because their purposes and 
loan terms most closely resemble those of Section 108 guaranteed loans.
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    \2\ U.S. 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, at pages 73-74. This 
fact has not changed since the issuance of this report.
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    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 2.00 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 from FY 2013

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through FY 2018, HUD expects that 43 percent of the Section 108 
portfolio will be similar to general purpose municipal debt and 57 
percent of the portfolio will be similar to industrial development 
bonds. In setting the fee at 2.00 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 2020. Note that the FY 2020 fee 
represents a 0.23 percent decrease from the FY 2019 fee of 2.23 
percent.
    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: July 12, 2019.
David C. Woll, Jr.,
Principal Deputy Assistant Secretary for Community Planning and 
Development.
[FR Doc. 2019-15627 Filed 7-22-19; 8:45 am]
 BILLING CODE 4210-67-P