[Federal Register Volume 85, Number 137 (Thursday, July 16, 2020)]
[Proposed Rules]
[Pages 43165-43168]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14436]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 401

[Docket No. FR 6122-P-01]
RIN 2577-AJ48


Rent Adjustments in the Mark-to-Market Program

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

ACTION: Proposed rule.

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SUMMARY: Under the Mark-to-Market program, HUD preserves the 
affordability of eligible multifamily housing projects by modifying 
above-market rents while restructuring project debt to an amount 
supportable by the modified rents. This proposed rule would revise the 
Mark-to-Market program regulations to clarify that all annual rent 
adjustments for projects subject to a restructuring plan are by 
application of an operating cost adjustment factor (OCAF) established 
by HUD. The current regulations contain a provision authorizing HUD to 
approve a request for a budget-based rent adjustment in lieu of an 
OCAF. However, this provision is both contrary to the governing 
statutory framework and inconsistent with Mark-to-Market renewal 
contracts, which allow only OCAF rent adjustments. The proposed rule 
would conform the regulations to the governing statutory provision, the 
terms of Mark-to-Market renewal contracts, and the programmatic 
practice of adjusting rents annually only by OCAF.

DATES: Comment Due Date: September 14, 2020.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule. Copies of all comments submitted are available for 
inspection and downloading at www.regulations.gov. To receive 
consideration as public comments, comments must be submitted through 
one of two methods, specified below. All submissions must refer to the 
above docket number and title.
    1. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
www.regulations.gov. HUD strongly encourages commenters to submit 
comments electronically. Electronic submission of comments allows the 
commenter maximum time to prepare and submit a comment, ensures timely 
receipt by HUD, and enables HUD to make them immediately available to 
the

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public. Comments submitted electronically through the 
www.regulations.gov website can be viewed by other commenters and 
interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.
    2. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 7th Street SW, Room 10276, 
Washington, DC 20410-0500.

FOR FURTHER INFORMATION CONTACT: Thomas R. Davis, Director, Office of 
Recapitalization, Office of Multifamily Housing Programs, Department of 
Housing and Urban Development, 451 Seventh Street SW, Room 6106, 
Washington, DC 20410; telephone number 202-402-7549. Persons with 
hearing or speech impairments may access this number via TTY by calling 
the Federal Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. History

    The Multifamily Assisted Housing Reform and Affordability Act of 
1997 (Title V of Pub. L. 105-65, approved October 27, 1997 and codified 
at 42 U.S.C. 1437f note) (MAHRA) authorizes the Mark-to-Market program, 
which is designed to preserve low-income rental housing affordability 
while reducing the long-term costs of federal rental assistance. Under 
the program, multifamily housing projects with above-market rents that 
are subject to an expiring contract under section 8 of the United 
States Housing Act of 1937 (42 U.S.C. 1437f) (Section 8) undergo both a 
restructuring of the project's HUD-insured or HUD-held debt and an 
initial renewal of its Section 8 contract so that a new first loan is 
serviceable based on modified rents.
    The renewal of the Section 8 contract is governed by section 515 of 
MAHRA. Under section 515(a), HUD is required to offer and an owner is 
required to accept an initial renewal of the project's Section 8 
contract if the renewal is in accordance with the terms and conditions 
specified in a mortgage restructuring and rental assistance sufficiency 
plan meeting the requirements of section 514 of MAHRA (Restructuring 
Plan). Under such a Restructuring Plan, the renewal rents are based on 
either comparable market rents, as required under section 514(g)(1) of 
MAHRA, or a budget, as permitted in limited circumstances under section 
514(g)(2). In either case, the rents are adjusted annually by an OCAF, 
as required under section 514(e)(2). At the conclusion of the debt-
restructuring process, HUD issues an initial renewal contract (Mark-to-
Market Renewal Contract) for a maximum 20-year term reflecting the 
renewal rents and requiring annual OCAF rent adjustments, and the owner 
executes a minimum 30-year use agreement, as required under section 
514(e)(6). As long as the use agreement remains in place, subsequent 
renewals are governed by section 515(b) of MAHRA.
    HUD initially implemented MAHRA through an interim rule published 
on September 11, 1998, at 63 FR 48926 (Interim Rule), both for projects 
that are subject to a Restructuring Plan (24 CFR part 401) and those 
that are not (24 CFR part 402). Consistent with section 514(e)(2) of 
MAHRA, the Interim Rule required that all projects subject to a 
Restructuring Plan receive annual OCAF rent adjustments (63 FR 48948). 
It also implemented section 524 of MAHRA, as it existed then, which 
authorized HUD to renew expiring Section 8 contracts for projects that 
were not undergoing debt-restructuring but was silent on rent 
adjustments. The Interim Rule reflected an administrative determination 
that rents for contracts renewed under section 524 would be adjusted by 
an OCAF but could be ``redetermined using a budget-based rent 
adjustment from time-to-time at the discretion of HUD'' (63 FR 48954).
    HUD issued the final rule implementing MAHRA on March 22, 2000, at 
65 FR 15485 (Final Rule). Approximately five months earlier, however, 
section 524 had undergone an extensive amendment (section 531(a) of 
Pub. L. 106-74, approved October 20, 1999) that expanded and refined 
the renewal terms for projects not subject to a Restructuring Plan. As 
amended, section 524 of MAHRA requires HUD to renew a project's 
expiring Section 8 contract at the request of the owner under one of 
various owner-selected options, provided that the project is eligible 
and the Secretary has determined that a Restructuring Plan is not 
necessary. The options in section 524(a) require that renewal rents not 
exceed market, while section 524(b)(1), which applies to a limited 
universe of projects identified in section 524(b)(2), prescribes a 
renewal rent formula unconstrained by market. Section 524(c)(1) 
requires annual OCAF rent adjustments but authorizes HUD to approve a 
budget-based rent adjustment in lieu of an OCAF. Section 524(c)(1) is 
explicitly limited, however, to contracts initially renewed under 
section 524(a), (b)(1), or (e)(2) of MAHRA. Relying on section 
524(c)(1), HUD included a provision in the Final Rule (Sec.  
401.412(b)) that had not appeared in the Interim Rule purporting to 
allow HUD to approve an owner's request for a budget-based rent 
adjustment in lieu of an OCAF for projects renewed under section 515(a) 
of MAHRA subject to a Restructuring Plan.
    To implement section 524(c)(1) of MAHRA, which HUD then thought to 
have relevance for projects subject to a Restructuring Plan, the Final 
Rule states with respect to Sec.  401.412, ``We . . . added a new 
paragraph (b) explaining the availability of budget-based adjustments 
upon request of the owner, subject to the approval of the Secretary, as 
provided in Pub. L. 106-74'' (emphasis added). Although the amended 
section 524 has no application to projects that are subject to a 
Restructuring Plan, HUD at that time viewed section 524 as the 
subsequent renewal authority for projects subject to a Restructuring 
Plan and therefore believed that a discretionary budget-based rent 
adjustment would have been available during the term of any subsequent 
renewal under section 524(a), (b)(1), or (e)(2) of MAHRA. In this 
regard, the preamble to the Final Rule states, ``A Restructuring Plan 
will provide for adjustments using OCAF under this section, but this 
section will not prevent HUD from offering [subsequent] renewal with 
rent levels higher than those resulting from OCAF rent adjustments, if 
legally authorized'' (emphasis added) (65 FR 15461). The preamble to 
the Final Rule further states, ``We added language . . . under which 
HUD . . . must offer to renew section 8 contracts as provided in a 
Restructuring Plan, subject to . . . the renewal authority available at 
the time of each contract expiration. Section 524 of MAHRA (as amended 
by Pub. L. 106-74) will be the [subsequent] renewal authority'' 
(emphasis added) (65 FR 15483).
    After publication of the Final Rule, however, HUD determined that 
for the life of the minimum 30-year use agreement required under 
section 514(e)(6) of MAHRA, the subsequent renewal authority for 
projects subject to a Restructuring Plan is section 515(b) of MAHRA, 
not section 524, and that only after the use agreement expires and the 
owner requests and is granted a subsequent renewal contract under 
section 524(a), (b)(1), or (e)(2) of MAHRA would a discretionary 
budget-based rent adjustment be available in lieu of an OCAF under 
section 524(c)(1). This determination is reflected in Mark-to-Market 
Renewal Contracts, which were finalized in the year following

[[Page 43167]]

publication of the Final Rule and which provide for annual rent 
adjustments by an OCAF without any provision authorizing a budget-based 
rent adjustment in lieu of an OCAF. Moreover, Mark-to-Market Renewal 
Contracts explicitly state that no rent adjustments other than an OCAF 
are allowed. Consistent with these determinations, HUD's policy has 
been not to approve a request for a budget-based rent adjustment while 
a project is subject to a Restructuring Plan despite the apparent 
authority to do so under Sec.  401.412(b) of the Final Rule.
    Like section 515(a) of MAHRA, which it implements, Sec.  401.554 of 
the Final Rule states that HUD will ``offer to renew or extend'' a 
Section 8 contract, as provided in a project's Restructuring Plan. 
Because the programmatic practice is to offer to renew rather than to 
extend, HUD is proposing to revise this language accordingly. In 
addition, HUD is proposing to remove a parenthetical phrase in Sec.  
401.554 suggesting that there may be more than one renewal authority 
for projects subject to a Restructuring Plan.

II. Justification for Change

    HUD is proposing this regulatory change to clarify the Mark-to-
Market regulatory scheme by aligning the text of Sec.  401.412 with 
section 514(e)(2) of MAHRA, the terms of Mark-to-Market Renewal 
Contracts regarding rent adjustments, and the programmatic practice of 
adjusting rents annually only by an OCAF. HUD believes that removing 
paragraph (b) would eliminate the misperception that a budget-based 
rent adjustment is available for projects that are subject to a 
Restructuring Plan. In addition, HUD believes that removing language in 
Sec.  401.554 stating that HUD will offer to ``extend'' Section 8 
contracts, and other language that refers to multiple renewal 
authorities, would clarify these provisions.

III. Summary of Proposed Rule

    HUD is proposing to remove Sec.  401.412(b), which provides that 
HUD may approve a request for a budget-based rent adjustment for 
projects that are subject to a Restructuring Plan.
    In addition, HUD is proposing to revise Sec.  401.554 to remove the 
statement that HUD will ``extend'' Section 8 contracts. In keeping with 
the explanation above, HUD is also proposing to remove a parenthetical 
reference in Sec.  401.554 to multiple renewal authorities for 
contracts subject to a Restructuring Plan.

IV. Findings and Certifications

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) generally 
requires an agency to conduct a regulatory flexibility analysis of any 
rule subject to notice and comment rulemaking requirements, unless the 
agency certifies that the rule will not have a significant economic 
impact on a substantial number of small entities. This proposed rule 
would codify existing statutory interpretations of the authorities 
granted for the Mark-to-Market program. It does not create compliance 
costs, nor does it alter the underlying operation of the Mark-to-Market 
program. Therefore, the undersigned certifies that this proposed rule 
would not have a significant economic impact on a substantial number of 
small entities.
    Nevertheless, HUD is sensitive to the fact that the uniform 
application of requirements on entities of differing sizes may place a 
disproportionate burden on small entities. HUD, therefore, is 
soliciting alternatives for compliance from small entities as to how 
these small entities might comply in a way less burdensome to them.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501-3520), an agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information, unless the 
collection displays a currently valid Office of Management and Budget 
(OMB) control number. This proposed rule does not change any 
information collection requirements.

Executive Order 12612, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on state and local 
governments and is not required by statute, or the rule preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the executive order. This proposed rule would not have 
federalism implications and would not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive Order.

Environmental Impact

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

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4; approved March 22, 1995) (UMRA) establishes requirements for Federal 
agencies to assess the effects of their regulatory actions on state, 
local, and tribal governments, and on the private sector. This proposed 
rule does not impose any Federal mandates on any state, local, or 
tribal government, or on the private sector, within the meaning of the 
UMRA.

List of Subjects for 24 CFR Part 401

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

    Accordingly, for the reasons described in the preamble, HUD 
proposes to amend 24 CFR part 401 as follows:

PART 401--MULTIFAMILY HOUSING MORTGAGE AND HOUSING ASSISTANCE 
RESTRUCTURING PROGRAM (MARK-TO-MARKET)

0
1. The authority for part 401 continues to read as follows:

    Authority:  12 U.S.C. 1715z-1 and 1735f-19(b); 42 U.S.C. 
1437(c)(8), 1437f(t), 1437f note, and 3535(d).

0
2. Revise Sec.  401.412 to read as follows:


Sec.  401.412  Adjustment of rents based on operating cost adjustment 
factor (OCAF).

    (a) OCAF. The Restructuring Plan must provide for annual adjustment 
of the restructured rents for project-based assistance by an OCAF 
determined by HUD.
    (b) Application of OCAF. HUD will apply the OCAF to the previous 
year's contract rent less the portion of that rent paid for debt 
service. This paragraph applies to renewals of contracts that receive 
restructured rents under either section 514(g)(1) or (2) of MAHRA.
0
3. Revise Sec.  401.554 to read as follows:


Sec.  401.554  Contract renewal and administration.

    HUD will offer to renew section 8 contracts as provided in each 
Restructuring Plan, subject to the availability of appropriations and 
subject to the renewal authority

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available at the time of each contract expiration. The offer will be 
made by HUD directly or through a PAE that has contracted with HUD to 
be a contract administrator for such contracts. HUD will offer to any 
PAE that is qualified to be the section 8 contract administrator the 
opportunity to serve as the section 8 contract administrator for a 
project restructured under a Restructuring Plan developed by the PAE 
under the Mark-to-Market Program. Qualifications will be determined 
under both statutory requirements and requirements issued by the 
appropriate office within HUD, depending on the type of section 8 
assistance that is provided.

Brian D. Montgomery,
Deputy Secretary.

[FR Doc. 2020-14436 Filed 7-15-20; 8:45 am]
BILLING CODE P