[Federal Register Volume 89, Number 151 (Tuesday, August 6, 2024)]
[Proposed Rules]
[Pages 63847-63850]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-17033]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 200

[Docket No. FR-6423-P-01]
RIN 2502-AJ72


Disbursing Multifamily Mortgage Proceeds: Permitting Mortgagees 
To Disburse Mortgage Proceeds With Mortgagor-Provided Funds

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, Department of Housing and Urban Development (HUD).

ACTION: Proposed rule.

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SUMMARY: When funds provided by a mortgagor to a mortgagee are not 
fully disbursed with the initial advance of the insured mortgage 
proceeds, the proposed rule would permit mortgagees to disburse up to 1 
percent of the mortgage amount initially endorsed for insurance before 
requiring that the funds provided by the mortgagor be disbursed in 
full. This proposed change would allow mortgagees to pool mortgages 
into mortgage-backed securities guaranteed by the Government National 
Mortgage Association prior to the funds provided by the mortgagor being 
disbursed in full.

DATES: Comments due October 7, 2024.

ADDRESSES: To receive consideration as public comments, comments must 
be submitted through one of the two methods specified in the text that 
follows. All submissions must refer to the docket number and title of 
this proposed rule.
    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 comments immediately available 
to the public. Commenters should follow the instructions provided on 
www.regulations.gov 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.
    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying at www.regulations.gov or between 8:00 
a.m. and 5:00 p.m. weekdays at the above address. HUD strongly 
encourages the public to view the docket file at www.regulations.gov. 
Due to security measures at the HUD Headquarters building, an advance 
appointment to review the public comments must be scheduled by calling 
the Regulations Division at 202-402-3055 (this is not a toll-free 
number). HUD welcomes and is prepared to receive calls from individuals 
who are deaf or hard of hearing, as well as individuals with speech or 
communication disabilities. To learn more about how to make an 
accessible telephone call, please visit https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs.
    In accordance with 5 U.S.C. 553(b)(4), a summary of this proposed 
rule may be found at www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Willie Fobbs III, Director, Office of 
Multifamily Production, Department of Housing and Urban Development, 
451 7th Street SW, Room 6134, Washington, DC 20410, telephone 202-402-
3242 (this is not a toll-free number). HUD welcomes and is prepared to 
receive calls from individuals who are deaf or hard of hearing, as well 
as individuals with speech or communication disabilities. To learn more 
about how to make an accessible telephone call, please visit https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs.

SUPPLEMENTARY INFORMATION:

I. Background

24 CFR 200.54 and Ginnie Mae Guaranteed Mortgage-Backed Securities

    Mortgagees seeking to originate a Federal Housing Administration 
(FHA)-insured mortgage regulated pursuant to 24 CFR part 200, subpart 
A, must comply with the project completion funding requirements in 24 
CFR 200.54. These require that a mortgagor deposit funds with its 
mortgagee that are sufficient, when added to the proceeds from the FHA-
insured mortgage, to assure completion of planned multifamily or 
healthcare facility project work and to pay the initial service charge, 
carrying charges, and legal and organization expenses incident to the 
construction of the project. Typically, 24 CFR 200.54(b) requires that 
the funds deposited by the mortgagor with the mortgagee (mortgagor-
provided funds) must be disbursed in full for project work, material, 
and incidental charges and expenses (collectively, ``project-related 
expenses'') before the mortgagee may disburse any mortgage proceeds. 
HUD requires that mortgagees disburse the mortgagor-provided funds in 
full before disbursing any mortgage proceeds as a basic risk 
measure.\1\
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    \1\ HUD's current regulations at 24 CFR 200.54(c) allow an 
exception to the requirement in 24 CFR 200.54(b) for certain 
projects involving low-income housing tax credit syndication 
proceeds, historic tax-credit syndication proceeds, New Markets Tax 
Credits proceeds, and funds provided by a grant or loan from a 
Federal, State, or local government.
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    For most mortgages regulated pursuant to 24 CFR part 200, subpart 
A, the mortgagor-provided funds are disbursed in full to pay for 
project-related expenses with the initial advance of the insured 
mortgage proceeds at the time the insured mortgage is endorsed. For 
certain mortgages, however, the amount of mortgagor-provided funds 
exceeds the amount of project-related expenses due at the time the 
insured mortgage is

[[Page 63848]]

endorsed. Where the mortgagor-provided funds are not fully disbursed at 
the time the insured mortgage is endorsed, the mortgagor-provided funds 
are fully disbursed through subsequent disbursements by the mortgagee, 
usually with the mortgagor-provided funds being disbursed within two 
months after the insured mortgage is endorsed.
    Given that 24 CFR 200.54(b) does not permit insured mortgage 
proceeds to be disbursed until the mortgagee disburses all mortgagor-
provided funds, if the mortgagor-provided funds are not fully disbursed 
at the time the insured mortgage is endorsed, the mortgage cannot be 
pooled into a mortgage-backed security (MBS) guaranteed by the 
Government National Mortgage Association (Ginnie Mae) without 
conflicting with 24 CFR 200.54(b).\2\ As such, for an insured mortgage 
to be pooled into a Ginnie Mae guaranteed MBS, the insured mortgage 
proceeds must be permitted to be disbursed.
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    \2\ For additional information about Ginnie Mae and Ginnie Mae's 
guarantee of MBSs, see Ginnie Mae's About Us web page, available at 
https://www.ginniemae.gov/about_us/who_we_are/Pages/funding_government_lending.aspx.
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    This conflict with 24 CFR 200.54(b) typically only exists for a 
short period of usually no longer than two months after the endorsement 
of the FHA-insured mortgage, by which time the mortgagor-provided funds 
are usually fully disbursed. During the short period where this 
conflict exists, the mortgagee must either implement unusual and 
burdensome mortgage servicing practices to maintain compliance with 24 
CFR 200.54(b) or else the mortgagee will not be able to pool the 
insured mortgage into a Ginnie Mae guaranteed MBS at the time of 
endorsement. If a mortgagee is unable to pool an insured mortgage into 
a Ginnie Mae guaranteed MBS at endorsement, the mortgagee might never 
be able to securitize the insured mortgage and might fail to meet 
contractually required delivery dates between the mortgagee and 
investor. This could potentially lead to costly investor compensation 
fees. The mortgagee may also experience issues relating to its 
financial liquidity cycle. When many insured mortgages are unable to be 
pooled into Ginnie Mae guaranteed MBSs at the time the insured 
mortgages are endorsed, cascading issues for the broader mortgage 
market can occur. These can include reducing the overall liquidity of 
the mortgage market and increasing the cost on mortgagors to borrow 
funds, which reduces the availability of housing and ultimately harms 
HUD's mission to create strong, sustainable, inclusive communities and 
affordable homes for all.

Partial Regulatory Waiver of 24 CFR 200.54(b)

    HUD has recently addressed the described conflict with the 
requirements in 24 CFR 200.54(b) for mortgages insured under National 
Housing Act sections 213 and 221(d)(4) by issuing a partial regulatory 
waiver of the requirements of 24 CFR 200.54(b) (Partial Waiver of 24 
CFR 200.54(b)).\3\ The Partial Waiver of 24 CFR 200.54(b) partially 
waived the requirement in 24 CFR 200.54(b) that mortgagor-provided 
funds ``must be disbursed in full'' for project-related expenses before 
any disbursement of funds from the insured mortgage. Instead, the 
Partial Waiver of 24 CFR 200.54(b) permitted, to the extent necessary, 
a mortgagee to disburse funds from the insured mortgage in an amount up 
to one-half percent (0.5%) of the initially endorsed mortgage amount. 
The Partial Waiver of 24 CFR 200.54(b) allows mortgagees to pool 
insured mortgages into Ginnie Mae guaranteed MBSs when mortgagor-
provided funds are not fully disbursed at the time the insured mortgage 
is endorsed because it allows mortgagees to meet the Ginnie Mae 
requirement that the insured mortgage proceeds be disbursable.
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    \3\ The Partial Waiver of 24 CFR 200.54(b) was initially granted 
in July 2021. See 87 FR 14563 (Mar. 15, 2022). The Partial Waiver of 
24 CFR 200.54(b) has subsequently been extended and remains in 
effect until July 4, 2025.
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II. This Proposed Rule

The Proposed Exception to 24 CFR 200.54(b)

    Through this proposed rule, HUD proposes to add an exception to the 
requirement in 24 CFR 200.54(b) that the funds provided by the 
mortgagor must be disbursed in full before the disbursement of any 
proceeds from the insured mortgage. This proposed rule would also make 
non-substantive terminology and organizational edits to 24 CFR 200.54 
that would not affect any other requirements within the section.
    The exception proposed to be added to 24 CFR 200.54(b) would permit 
mortgagees, where the funds provided by the mortgagor are not fully 
disbursed with the initial advance of the insured mortgage proceeds, to 
disburse up to 1 percent of the mortgage amount initially endorsed for 
insurance before requiring that the funds provided by the mortgagor be 
disbursed in full. This proposed exception would permit that a 
mortgagee could disburse mortgage proceeds at the time the mortgage is 
initially endorsed for insurance up to a maximum of 1 percent of the 
initially endorsed mortgage amount. Alternatively, a mortgagee could 
choose to disburse mortgage proceeds in any amount on a monthly basis, 
whether consecutive or not, up to a combined maximum of 1 percent of 
the initially endorsed insured mortgage amount until the mortgagor-
provided funds are fully disbursed.
    As described in the Background section of this proposed rule, the 
Partial Waiver of 24 CFR 200.54(b) permits a mortgagee to disburse 
funds from the insured mortgage in an amount up to one-half percent 
(0.5%) of the initially endorsed mortgage amount. HUD is proposing to 
set the amount of the proposed exception to 24 CFR 200.54(b) at 1 
percent of the initially endorsed mortgage amount because in an 
environment where mortgage interest rates increase, additional 
mortgagor-provided funds are required to be deposited with the 
mortgagee. Where additional mortgagor-provided funds are deposited with 
a mortgagee, there is an increased chance that the mortgagor-provided 
funds will not be fully disbursed when the insured mortgage is 
initially endorsed. Permitting a 1% of the initially endorsed mortgage 
amount exception to 24 CFR 200.54(b) will allow additional mortgages to 
be securitized at the time of endorsement with no incremental risk to 
HUD compared to the one-half percent (0.5%) prescribed in the Partial 
Waiver of 24 CFR 200.54(b).
    The proposed exception to 24 CFR 200.54(b) would allow mortgagees 
to disburse mortgagor-provided funds for project-related expenses in 
conjunction with the proceeds from the insured mortgage at the time the 
mortgage is initially endorsed even where the mortgagor-provided funds 
are not fully disbursed with the initial advance of the insured 
mortgage proceeds. This would allow mortgagees to pool a mortgage into 
a Ginnie Mae guaranteed MBS even when the mortgagor-provided funds were 
not fully disbursed with the initial advance of the insured mortgage 
proceeds.
    This proposed exception would help keep FHA-insured mortgage 
products competitive in economic environments with rising interest 
rates and/or multi-year high interest rates, especially for new 
construction projects, where a higher proportion of mortgage proceeds 
are constrained by FHA's debt service coverage ratio requirements. In 
an economic environment with rising and high interest rates, mortgagors 
must deposit additional funds with their mortgagee, making it more 
likely that

[[Page 63849]]

the mortgagor-provided funds will not be fully disbursed during the 
initial advance of the insured mortgage proceeds. HUD believes that the 
proposed exception would help ensure that interest rates for FHA-
insured mortgages remain competitive and ensure the liquidity of FHA-
insured mortgages on the secondary mortgage market.

Alternative Solution Considered

    In determining whether to propose the exception to 24 CFR 
200.54(b), HUD considered whether an alternative solution to the 
proposed exception to 24 CFR 200.54(b) existed that would better 
address the issue outlined throughout this proposed rule. One 
alternative solution considered by HUD was to encourage the mortgage 
industry to contract for the future delivery of MBSs once all 
mortgagor-provided funds had been disbursed from the insured mortgages 
that were to be pooled. While this solution could, in theory, correct 
the same issue that the proposed exception addresses, HUD ultimately 
determined that this would likely cause higher borrowing costs for 
mortgagors because interest rates would need to be hedged through some 
mechanism. Further, mortgagees would potentially experience unfavorable 
accounting classifications, having to book recently closed mortgages as 
``mortgages held for sale,'' rather than booking closed mortgages as 
the more favorable ``mortgage serving rights.'' Mortgagees could also 
face unfavorable changes to their counterparty credit profile because 
of the need to hold whole mortgages on their balance sheet for a number 
of months, likely precluding smaller mortgagees from warehouse credit 
and potentially creating funding constraints. For these reasons, HUD 
believes that the proposed exception to 24 CFR 200.54(b) would be a 
better solution for mortgagors, mortgagees, FHA, and the secondary 
mortgage markets.

Evaluation of the Partial Waiver of 24 CFR 200.54(b)

    HUD has evaluated the results of granting the Partial Waiver of 24 
CFR 200.54(b). At the time that HUD granted the Partial Waiver of 24 
CFR 200.54(b), HUD determined that permitting up to one-half percent 
(.5%) of the initially endorsed mortgage amount to be disbursed 
represented only a negligible increase of risk to FHA. As expected, 
since granting the Partial Waiver of 24 CFR 200.54(b) in July 2021, HUD 
has received positive feedback from mortgagees regarding the use of the 
partial waiver and FHA has experienced no negative impacts due to 
mortgagees' reliance on the partial waiver.
    In reviewing the knowledge gained from the implementation of the 
Partial Waiver of 24 CFR 200.54(b), HUD designed this proposed rule to 
be similar to the partial waiver, with a notable exception being that 
this proposed rule permits mortgagees to disburse mortgage proceeds in 
an amount up to 1 percent, rather than one-half percent, of the 
initially endorsed mortgage amount before requiring that the mortgagor-
provided funds be disbursed in full. HUD determined that the proposed 1 
percent of the initially endorsed mortgage amount produces no 
meaningful increase of risk to FHA, while better helping to ensure that 
mortgagees are more easily able to pool mortgages into Ginnie Mae 
guaranteed MBSs.
    In summary, HUD believes that the proposed exception to 24 CFR 
200.54(b) is the best solution to the potential conflict with the 
requirements in 24 CFR 200.54(b) where the mortgagor-provided funds are 
not fully disbursed with the initial advance of the insured mortgage 
proceeds for mortgages intended to be pooled into Ginnie Mae guaranteed 
MBSs. The proposed exception would assist FHA in keeping its mortgage 
products competitive and would further HUD's mission to create strong, 
sustainable, inclusive communities and affordable homes for all.

III. Findings and Certifications

Regulatory Review--Executive Orders 12866, 13563, and 14094

    Pursuant to Executive Order 12866 (Regulatory Planning and Review), 
a determination must be made whether a regulatory action is significant 
and therefore, subject to review by the Office of Management and Budget 
(OMB) in accordance with the requirements of the Executive Order. 
Executive Order 13563 (Improving Regulations and Regulatory Review) 
emphasizes the importance of quantifying both costs and benefits, 
reducing costs, harmonizing rules, and promoting flexibility. The order 
also directs Executive agencies to analyze regulations that are 
``outmoded, ineffective, insufficient, or excessively burdensome, and 
to modify, streamline, expand, or repeal them in accordance with what 
has been learned.'' Executive Order 13563 further directs that, where 
relevant, feasible, and consistent with regulatory objectives, and to 
the extent permitted by law, agencies are to identify and consider 
regulatory approaches that reduce burdens and maintain flexibility and 
freedom of choice for the public. Executive Order 14094 (Modernizing 
Regulatory Review) amends section 3(f) of Executive Order 12866, among 
other things.
    As discussed in this preamble, the only substantive regulatory 
change proposed in this rule would permit mortgagees, where the funds 
provided by the mortgagor are not fully disbursed with the initial 
advance of the insured mortgage proceeds, to disburse up to 1 percent 
of the mortgage amount initially endorsed for insurance before 
requiring that the funds provided by the mortgagor be disbursed in 
full. This rule was determined not to be a ``significant regulatory 
action'' as defined in section 3(f) of Executive Order 12866 as amended 
by Executive Order 14094 and is not an economically significant 
regulatory action and therefore was not subject to OMB review.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements, unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
The changes proposed in this rule are limited to permitting mortgagees, 
where the funds provided by the mortgagor are not fully disbursed with 
the initial advance of the insured mortgage proceeds, to disburse up to 
1 percent of the mortgage amount initially endorsed for insurance 
before requiring that the funds provided by the mortgagor be disbursed 
in full. These proposed changes would not have a significant economic 
impact on a substantial number of small entities. Accordingly, the 
undersigned certifies that the proposed rule will not have a 
significant economic impact on a substantial number of small entities.
    Notwithstanding HUD's determination that this rule will not have a 
significant impact on a substantial number of small entities, HUD 
specifically invites comments regarding any less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in the preamble to this rule.

Executive Order 13132, Federalism

    Executive Order 13132 (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 preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the

[[Page 63850]]

Executive Order. This proposed rule does not have federalism 
implications and does not impose substantial direct compliance costs on 
State and local governments or preempt State law within the meaning of 
the Executive Order.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations at 24 CFR part 50, 
which implement section 102(2)(C) of the National Environmental Policy 
Act of 1969 (42 U.S.C. 4332(2)(C)). The Finding of No Significant 
Impact is available for public inspection on www.regulations.gov and 
between the hours of 8 a.m. and 5 p.m. weekdays in the Regulations 
Division, Office of General Counsel, Room 10276, Department of Housing 
and Urban Development, 451 7th Street SW, Washington, DC 20410-0500.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) establishes requirements for Federal agencies to 
assess the effects of their regulatory actions on State, local, and 
Tribal governments, and on the private sector. This proposed rule would 
not impose any Federal mandates on any State, local, or Tribal 
governments, or on the private sector, within the meaning of the UMRA.

List of Subjects in 24 CFR Part 200

    Administrative practice and procedure, Claims, Equal employment 
opportunity, Fair housing, Housing standards, Lead poisoning, Loan 
programs--housing and community development, Mortgage insurance, 
Organization and functions (Government agencies), Penalties, Reporting 
and recordkeeping requirements, Social Security, Unemployment 
compensation, Wages.

    For the reasons stated above, HUD proposes to amend 24 CFR part 200 
as follows:

PART 200--INTRODUCTION TO FHA PROGRAMS

0
1. The authority citation for part 200 continues to read as follows:

    Authority: 12 U.S.C. 1702-1715z-21; 42 U.S.C. 3535(d).

0
2. In Sec.  200.54:
0
a. Revise paragraph (a) by removing the citation to ``paragraph (d)'' 
and adding, in its place, a citation to ``paragraph (c)'';
0
b. Revise paragraph (b) by removing the word ``mortgage'' and adding, 
in its place, ``insured mortgage'';
0
c. Redesignate paragraph (c) as paragraph (b)(1);
0
d. Amend newly redesignated paragraph (b)(1) by removing the word 
``mortgage'' and adding, in its place, ``insured mortgage'' and by 
adding the word ``or'' at the end of the paragraph;
0
e. Add paragraph (b)(2); and
0
f. Redesignate paragraph (d) as paragraph (c).
    The addition reads as follows:


Sec.  200.54  Project completion funding.

* * * * *
    (b) * * *
    (2) If the funds provided by the mortgagor are not fully disbursed 
with the initial advance of the insured mortgage proceeds, the 
mortgagee may disburse up to 1 percent of the mortgage amount initially 
endorsed for insurance before requiring that the funds provided by the 
mortgagor be disbursed in full. The 1 percent of the initially endorsed 
mortgage amount may be disbursed in full at the time of initial 
endorsement or may be disbursed in any amount on a monthly basis, 
whether consecutive or nonconsecutive, until the funds provided by the 
mortgagor are fully disbursed.
* * * * *

Julia R. Gordon,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2024-17033 Filed 8-5-24; 8:45 am]
BILLING CODE 4210-67-P