[Federal Register Volume 77, Number 86 (Thursday, May 3, 2012)]
[Proposed Rules]
[Pages 26218-26229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-10690]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 5, 200, 207, and 232
[Docket No. FR-5465 P-01]
RIN-2502-AJ05
Federal Housing Administration (FHA): Section 232 Healthcare
Facility Insurance Program-Strengthening Accountability and Regulatory
Revisions Update
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Proposed rule.
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SUMMARY: In 2010 through 2011, HUD commenced and completed the process
of revising regulations applicable to, and closing documents used in,
FHA insurance of multifamily rental projects, to reflect current policy
and practices in the multifamily mortgage market. The multifamily
rental project regulations and closing documents had not been updated
in more than 20 years. Through this proposed rule, HUD commences a
similar process for its regulations governing insurance of healthcare
facilities under section 232 of the National Housing Act, and the
closing documents used in such transactions. HUD's Section 232 program
insures mortgage loans to facilitate the construction, substantial
rehabilitation, purchase, and refinancing of nursing homes,
intermediate care facilities, board and care homes, and assisted-living
facilities. This rule proposes amendments to update HUD's Section 232
regulations, to reflect current policy and practices, and to improve
accountability and strengthen risk management.
DATES: Comment Due Date: July 2, 2012.
ADDRESSES: Interested persons are invited to submit comments regarding
this proposed rule to the Regulations Division, Office of General
Counsel, Department of Housing and Urban Development, 451 7th Street
SW., Room 10276, Washington, DC 20410-0500. Communications must refer
to the above docket number and title. There are two methods for
submitting public comments. All submissions must refer to the above
docket number and title.
1. 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.
2. 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 public. Comments submitted electronically through the
www.regulations.gov Web site 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.
Note: To receive consideration as public comments, comments must
be submitted through one of the two methods specified above. Again,
all submissions must refer to the docket number and title of the
rule. No Facsimile Comments. Facsimile (FAX) comments are not
acceptable.
[[Page 26219]]
Public Inspection of Public Comments. All properly submitted
comments and communications submitted to HUD will be available for
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the
above address. 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) 708-3055 (this
is not a toll-free number). Individuals with speech or hearing
impairments may access this number via TTY by calling the Federal Relay
Service at 1-800-877-8339. Copies of all comments submitted are
available for inspection and downloading at www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Michael B. Vaughn, Director, Office of
Residential Care Facilities, Office of Healthcare Programs, Office of
Housing, Department of Housing and Urban Development, 451 7th Street
SW., Room 6264, Washington, DC 20410-8000; telephone number 202-708-
0599 (this is not a toll-free number). Persons with hearing or speech
impairments may access this number through TTY by calling the toll-free
Federal Relay Service at 1-800-877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
The American population is undergoing a significant demographic
change as an increasing portion is age 65 or older or approaching
65.\1\ As several governmental and private organizations have reported,
the growing number of older adults is placing increased demands on the
public health system and on medical and social services.\2\ These
demands include greater need for nursing homes, long-term care
facilities, and assisted living arrangements. Further, although options
for long-term care and assisted living have expanded, nursing homes
will likely retain a major role in caring for the most severely
impaired and vulnerable populations.\3\ Moreover, nursing homes are
increasingly offering medical services similar to those offered in
hospitals after surgery, illness, or other sudden medical problems. In
those situations, older adults in particular need a higher level of
care because hospital stays are shorter than previously.\4\
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\1\ See http://www.aoa.gov/aoaroot/aging_statistics/index.aspx.
\2\ See http://www.cdc.gov/mmwr/preview/mmwrhtml/mm5206a2.htm.
\3\ Bercovitz, Anita, Decker, Frederic H., Jones, Adrienne,
Remsburg, Robin, End of Life Care in Nursing Homes: 2004 National
Nursing Home Survey, National Health Statistics Reports, No. 9,
October 8, 2008, pages 1 and 2.
\4\ See http://www.healthinaging.org/agingintheknow/chapters_print_ch_trial.asp?ch=15.
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The Section 232 Program
Section 232 of the National Housing Act (12 U.S.C. 1715w) (Section
232) authorizes FHA to insure mortgages made by private lenders to
finance the development of nursing homes, intermediate care facilities,
board and care homes, and assisted living facilities (collectively,
residential healthcare facilities). The Section 232 program allows for
long-term, fixed-rate financing for new and rehabilitated properties
for up to 40 years. Existing properties without rehabilitation can be
financed with or without Ginnie Mae \5\ Mortgage Backed Securities for
up to 35 years.
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\5\ Ginnie Mae is a registered service mark of the Government
National Mortgage Association; See http://www.ginniemae.gov/.
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Eligible borrowers under the Section 232 program include investors,
builders, developers, public entities (nursing homes), and private
nonprofit corporations and associations. For nursing homes only,
applicants may be public agencies that are licensed or regulated by a
state to care for convalescents and people who need nursing or
intermediate care. The documents executed at loan closing provide that
the borrower entity may not engage in any other business or activity.
Facilities covered by an FHA-insured mortgage under the Section 232
program must accommodate 20 or more residents who require skilled
nursing care and related medical services, or those who, while not in
need of nursing home care, are in need of minimum but continuous care
provided by licensed or trained personnel. Assisted living facilities,
nursing homes, intermediate care facilities, and board and care homes
may be combined in the same facility covered by an insured mortgage or
may be in separate facilities. Insured mortgages may include the cost
of major movable equipment, daycare facilities, and the installation of
fire safety equipment. Assisted living facilities, nursing homes,
intermediate care homes, and board and care homes must be licensed or
regulated by the appropriate state agency, municipality, or other
political subdivision where the facility is located.
The maximum amount of the loan for new construction and substantial
rehabilitation is equal to 90 percent (95 percent for nonprofit
organization sponsors) of the estimated value of physical improvements
and major movable equipment. For existing projects, the maximum is 85
percent (90 percent for nonprofit organization sponsors) of the
estimated value of the physical improvements and major movable
equipment.
As the need for residential care facilities has expanded, requests
to FHA to make mortgage insurance available for such facilities has
also expanded. As with any program expansion, FHA seeks to ensure that
program requirements currently in place are sufficient to meet
increased demand, and prevent mortgage defaults that not only impose a
risk to the FHA insurance fund but also jeopardize residents of Section
232 facilities.
The Need for Regulatory Update
HUD's regulations governing the Section 232 program are codified in
24 CFR part 232. These regulations were promulgated in 1971, with some
revisions made in the 1970s and the 1980s. Two regulatory updates were
issued in the 1990s. On November 29, 1994, HUD issued a final rule that
amended the Section 232 regulations to implement statutory authority to
insure assisted living facilities for the care of frail elderly
persons, as authorized by section 511 of the Housing and Community
Development Act of 1992 (Pub. L. 102-550, approved October 28, 1992).
(See 59 FR 61228.) On April 1, 1996, HUD issued a final rule to comply
with the then-Administration's regulatory review initiative to
streamline regulations, including by removing obsolete ones. (See 63 FR
14396.) The preamble to that final rule stated that the only changes
being made to the Section 232 regulations were to remove the regulatory
provisions concerning lender eligibility and to provide a cross-
reference to 24 CFR part 200, subpart A, which addressed the general
eligibility requirements to be approved as an FHA-approved lender. (See
63 FR 14397.) The 1996 rule was the last time that HUD amended the
Section 232 regulations. Given the far greater demand today for nursing
homes, and long-term care and assisted living facilities, and the
changes, over the years, in how these facilities offer services to an
aging population, as discussed above, HUD's Section 232 regulations
need to be revised and updated.
In the 1970s, regulations governing FHA-insured transactions were
generally structured so that details pertaining to the duties and
obligations of parties involved in the transaction were primarily
addressed in contractual documents, and that has been the case as well
for the Section 232 regulations.
[[Page 26220]]
This approach has offered FHA and the parties to a transaction the
necessary flexibility to adjust requirements as may be appropriate
given the specifics of a given transaction, and HUD believes they
should be retained for certain transaction aspects. After 16 years,
however, certain policy and practices have developed that are not
unique to certain parties and transactions and should be reflected in
regulation. For example, since the operating revenues of the healthcare
facility determine the financial health of the project and the FHA
insurance fund, it has become clear that oversight by FHA of such
revenues is vital.
II. This Proposed Rule
Through this rule, and similar to HUD's recent update of
multifamily rental project regulations and closing documents, HUD
proposes to update its Section 232 regulations and related closing
documents. Notice of the publication of the documents is provided
separately in the Federal Register through Notice FR-5623-N-01, Federal
Housing Administration (FHA) Healthcare Facility Documents: Proposed
Revisions and Updates and Notice of Information Collection. Through
this proposed rule, HUD updates terminology and makes amendments to
reflect current policy and practices. The specific amendments proposed
to update HUD's Section 232 regulations by this rule follow. The update
includes amendments to 24 CFR parts 5, 200, 207, and 232 dealing with,
respectively, Uniform Reporting Standards, Real Estate Assessment
Center (REAC) inspections, Multifamily Mortgage Insurance contract
requirements, and strengthening of the eligibility and oversight
provisions of the healthcare programs. As the most significant
proposals are in 24 CFR part 232, these are addressed first in this
part of the preamble.
A. Mortgage Insurance for Nursing Homes, Intermediate Care Facilities,
Board and Care Homes, and Assisted Living Facilities (Part 232)
Nomenclature Change
In its review of the regulations in 24 CFR part 232, HUD noted that
the regulations use both the term ``borrower'' and ``mortgagor.'' These
terms have the same meaning, and to avoid any misunderstanding that
they have different meanings, this proposed rule would substitute the
term ``borrower'' for ``mortgagor'' throughout the part 232
regulations. Closing documents for the Section 232 program may
sometimes refer to the borrower as the ``mortgagor,'' ``lessor,'' and/
or the ``owner.''
Eligibility Requirements (Subpart A)
Subpart A of the part 232 regulations, entitled ``Eligibility
Requirements,'' would be revised as follows:
The rule would revise eligibility requirements under Sec. 232.1 to
establish an exception from the multifamily program requirements for
eligible borrowers. Eligible borrowers for multifamily projects are
addressed in 24 CFR 200.5.
A new Sec. 232.3 is added to part 232 to provide an appropriate
definition of an eligible borrower for healthcare facilities. In a
Section 232 transaction, HUD maintains a relationship with the
borrower, and the borrower assumes a responsibility to ensure the
appropriate maintenance and use of project assets. Given the importance
of this relationship, the proposed rule would include a new definition
of eligible borrower in Sec. 232.3. This revised definition would
conform to current legal changes in the forms of commercial property
ownership. HUD notes that the single asset entity form of ownership has
become the standard form of ownership for commercial real estate
transactions. The revised definition, therefore, provides that the
borrower shall be a single asset borrower entity acceptable to the
Federal Housing Commissioner (Commissioner) and shall possess the power
necessary and incidental to operating the project. The regulation
provides that the Commissioner may approve an exception to this single
asset requirement in limited circumstances based upon such criteria as
may be specified by the Commissioner.
The rule would redesignate existing eligibility requirements
presently contained in current Sec. 232.3. That section presently
establishes the standards for healthcare facility bathroom and resident
ratios and access. Moving this section to Sec. 232.7 would merely
restructure the sequence of the eligibility requirements in the
regulations.
The rule would add a new Sec. 232.9 to define mortgaged property.
Mortgaged property would be defined to include all of the borrower's
interest in any property, real, personal, or mixed, covered by the
mortgage or mortgages securing the note endorsed for insurance or held
by the Secretary. This definition is consistent with the definition of
mortgaged property currently in the Security Agreement, used in Section
232 transactions, and as used in the revised Borrower's Security
Instrument.
The rule would add Sec. 232.11 to require borrowers to establish
at final closing and maintain throughout the term of the mortgage loan
a long-term debt service reserve account. Given the complexities of,
and volatility of both funding for and market demand for residential
care facilities, such reserve account is important for improved risk
management. The reserve account may be financed from mortgage proceeds,
provided that the loan remains within the loan to value ratio. (See
Sec. 232.903, discussed below.) The amount required to be initially
placed in the borrower's long-term debt service reserve account, and
the minimum long-term balance to be maintained in that account, will be
determined during underwriting and separately identified in the firm
commitment. Although HUD may, under certain circumstances, permit the
balance to fall below the required minimum long-term balance, the owner
may not take any distribution except when both the long-term debt
service reserve account is funded at the minimal long-term level and
such distribution is otherwise permissible. The proposed establishment
of the long-term debt service reserve account is in conjunction with
the proposals governing the use and distribution of project funds,
which is discussed below. This long-term reserve account would be
required for new loans and refinancings.
Contract Rights and Obligations (Subpart B)
Subpart B of the part 232 regulations addresses contract rights and
obligations to which all section 232 transactions are subject unless
otherwise specified in another regulatory section in part 232.
Section 232.251, entitled ``Cross-Reference,'' would be retitled
``Other Applicable Regulations'' and would continue to include the
regulations cross-referenced in existing Sec. 232.251, but also
clarify the applicability of the new provisions included in subpart B.
The rule would add a new Sec. 232.254 to provide that borrowers
may, to the extent allowed in their transactional loan documents and
applicable law, make and take distributions of mortgaged property.
Although previously the borrower could take distributions only annually
(or, in limited circumstances, semi-annually), the proposed rule would
allow borrowers to take distributions more frequently, provided that,
upon making a calculation of borrower surplus cash, no less frequently
than semi-annually, they can demonstrate positive surplus cash in their
semi-annual financial reports or repay any distributions made
[[Page 26221]]
during the fiscal period to the extent that they are not in a positive
surplus cash position at the end of the fiscal period in which
distributions are made. HUD has included language in the proposed
regulation to clarify that it does not intend to override existing
transactional agreements.
The proposed rule provides that upon each calculation of borrower
surplus cash, the borrower must demonstrate positive surplus cash, or,
to the extent that surplus cash is negative, the borrower must repay
any distributions taken during such calculation period within 30 days
or within such shorter period as may be required by HUD. The borrower
shall be deemed to have taken distributions to the extent that surplus
cash is negative unless, in conjunction with the calculation of surplus
cash, the borrower provides to HUD documentation evidencing, to HUD's
reasonable satisfaction, a lesser amount of total distributions.
New Sec. 232.254 would also include a definition of borrower
surplus cash, which would be defined in the Borrower Regulatory
Agreement.
The rule would add a new Sec. 232.256 to require that a borrower
may not lease any portion of the project, or enter into any agreement
with an operator without HUD's prior written consent.
The rule would revise the introductory paragraph of Sec. 232.903,
relating to the Sec. 232/223(f) program, by amending the maximum
mortgage amounts to provide that the new debt service reserve account
may be considered part of the cost of financing. No such amendment is
necessary for any Sec. 232 programs other than Sec. 232/223(f),
since, for other programs, funding of the debt service reserve is an
eligible cost that may be funded from mortgage proceeds to the extent
that the insured loan remains below the maximum loan to value ratio.
Eligible Operators and Facilities and Restrictions on Fund
Distributions (New Subpart F)
This proposed rule would add to part 232 a new subpart F entitled,
``Eligible Operators and Facilities and Restrictions on Fund
Distributions.'' As noted earlier in this preamble, operators carry out
significant day-to-day duties in the administration of healthcare
facilities. HUD finds that this important role needs to be explicitly
addressed in regulation, by providing for the requisite accountability
by such entities. The proposed new provisions recognize that a borrower
may share its responsibility over the project with another entity.
However, the fact that a borrower chooses to contract with a separate
entity to operate the project does not relieve the borrower of its
obligation to safeguard and ensure the proper use of all project
assets, or of its obligation to ensure that acts of the operator do not
cause the borrower to be in noncompliance with the borrower's own
obligations. Instead, these new provisions are directed to ensuring
that an operator, which may be an entity separate from the borrower, is
also required to safeguard and ensure the proper use of all project
assets.
New Sec. 232.1001 would advise that the scope of this new subpart
is to establish the requirements applicable to the operator of a
residential care facility under the Section 232 regulations.
New Sec. 232.1003 would define several key terms used in a Section
232 transaction. Section 232.1003 would define ``project,'' ``identity
of interest projects,'' ``management agent,'' ``operator,'' and ``owner
operator''.
New Sec. 232.1005 would address commingling of funds and direct
that an operator must not, without HUD's prior approval, allow funds
attributable to an FHA-insured or HUD-held healthcare facility to be
commingled with funds attributable to another healthcare facility or
business.
New Sec. 232.1007 would provide that payments from operating funds
for goods and services must be reasonable and not exceed amounts
normally paid for such goods or services in the geographic area where
the services are rendered or the goods are furnished, unless otherwise
approved by HUD.
New Sec. 232.1009 provides that no principal of the borrower
entity may receive a salary or any payment of funds derived from
operation of the project, other than from permissible distributions,
without HUD's prior approval.
Violations of these requirements on the use of project assets and
income would be subject to double damages, in addition to HUD's other
remedies, pursuant to statutory amendments, described hereinafter,
enacted in 2004. Section 421 of the Housing and Community Development
Act of 1987 (12 U.S.C. 1715z-4a), entitled ``Double damages remedy for
unauthorized use of multifamily housing project assets and income,''
was amended by section 220 of Title II of Division I of the
Consolidated Appropriations Act, 2005 (Public Law 108-447, 118 Stat.
2809, approved December 8, 2004), to expressly provide that a violation
by ``any person'' of a regulatory agreement that applies to ``a nursing
home, intermediate care facility, board and care home, assisted living
facility, or hospital whose mortgage is or, at the time of the
violations, was insured or held by the Secretary under title II of the
National Housing Act'' is subject to the double damages provisions of
12 U.S.C. 1715z-4a (See 118 Stat. 3320, and 12 U.S.C. 1715z-
4a(a)(1)(A).) Section 220 further amended section 421 to include as
``any person'' subject to double damages ``any nursing home lessee or
operator'' and to permit an action for double damages ``to recover any
assets or income used by a person in violation of * * * any applicable
regulation.'' (See 12 U.S.C. 1715z-4a(a)(2)(D) and 12 U.S.C. 1715z-
4a(a)(1)(D).) Any assets or income used in violation of these
regulatory requirements would be subject to double damages under
section 421, as well as to all other remedies available to HUD, in the
same way that use of assets or income in violation of a regulatory
agreement is subject to such double damages and other remedies.
New Sec. 232.1011 would address financial statements, which are
also discussed in the proposed amendment to 24 CFR 5.801 below. This
new section provides that, within 90 days following the end of each
fiscal year, the owner must provide HUD with audited financial
statements. These audited financial statements must be prepared and
certified in accordance with the requirements of 24 CFR 5.801 and
200.36. The operator must provide HUD with complete quarterly and year-
to-date financial reports based on an examination of the books and
records of the operator's operations with respect to the healthcare
facility.
New Sec. 232.1013 would address leases and would provide that,
except as provided in residential agreements in the normal course of
business, an operator may not lease or sublease any portion of the
project without HUD's prior written approval.
New Sec. 232.1015 would address the role of management agents in a
Section 232 project and would provide that an operator may, with the
prior written approval of HUD, execute a management agent agreement
setting forth the duties and procedures for managing matters related to
the project. However, both the management agent and the management
agent agreement must be acceptable to HUD and approved in writing by
HUD. New Sec. 232.1015 also provides that an operator may not enter
into any agreement that provides for a management agent to have rights
to or claims on funds owed to the operator.
New Sec. 232.1015 would also address fees paid by an operator or
borrower to a management agent. This section provides that management
agent agreements and the fees set forth therein
[[Page 26222]]
must be approved by HUD, and that the fee may not be renegotiated
without HUD's approval once the management agent agreement has been
executed. New Sec. 232.1015 also provides that HUD may approve an
identity-of-interest management agent to be a management agent only if
amounts paid to the identity-of-interest agent for goods and services
provided to the healthcare facility are not in excess of amounts that
would be charged by an independent agent and only if all goods and
services benefit the project.
New Sec. 232.1017 would address treatment of project revenue. New
Sec. 232.1017(a) directs that an operator must deposit in a separate
segregated account in the project's name all revenue the operator
receives operating the healthcare facility, and that the account must
be with a financial institution whose deposits are insured by an agency
of the Federal Government, provided that, in order to minimize risk to
the insurance fund, where balances are likely to exceed federal limits
on insurance of such deposits, funds must be in depository institutions
acceptable to Ginnie Mae.
New Sec. 232.1017(b) provides that operators, whether owner-
operators or non-owner operators, must ensure that the healthcare
facility maintain positive working capital at all times. If a quarterly
financial statement demonstrates negative working capital, the operator
must cure such violation or HUD may declare a default of the operator's
regulatory agreement and pursue remedies.
New Sec. 232.1019 reflects recognition of the highly regulated
environment in which many Section 232 projects operate, and would
require operators, unless HUD determines otherwise, to promptly notify
the owner, mortgagee, and HUD of certain matters placing the facility's
viable operation, and thus the mortgage security, at substantial risk.
These matters include violations of permits and approvals, imposition
of civil money penalties, or governmental investigations or inquiries
involving fraud. HUD has determined that, given the responsibilities of
servicing lenders with respect to risk mitigation of their residential
care facility portfolio, it is appropriate that the lenders are timely
provided with the same financial, census, and performance data (of the
owner entity, as well as operator entity) that HUD is requiring
borrowers and operators to routinely provide to HUD. Accordingly, this
regulatory section provides that, concurrently with submitting to HUD
financial data and census and performance data, the borrower and
operator also provide this data to the servicing lender.
In addition to the amendments made to the Section 232 regulations,
HUD makes the following conforming amendments to 24 CFR parts 5, 200,
and 207.
B. Uniform Financial Reporting Standards (24 CFR Part 5; Sec. 5.801)
This proposed rule would amend the reporting requirements of 24 CFR
5.801 to include operators of projects with mortgages insured or held
by HUD under the Section 232 program as entities that must submit
financial reports. Borrowers are currently subject to this regulatory
reporting requirement. HUD has determined that the audited financial
statements of a borrower/owner are not sufficient to assess the
financial status of a Section 232 project, because the viability of the
project is heavily dependent on the operator's financial performance.
HUD must also receive and review the financial statements of the
operator, as may be applicable, for an accurate assessment of the
project's financial status.
This proposed rule would, therefore, require owners to submit
audited financial statements on an annual basis and would require
operators to submit financial statements quarterly, covering separately
the most recent quarter and the fiscal year to date. Quarterly and
year-to-date financial statements are appropriate for operators for a
number of reasons. First, they provide much more timely notice of
operator financial weaknesses and trends than annual statements would
provide. The timeliness is further enhanced in that the operator
statements may be operator-certified rather than audited, allowing the
operator to provide them much more promptly at the end of a reporting
period. With respect to the skilled nursing facilities (of which a
large portion of HUD's residential care facility portfolio is
comprised), much of the information is also furnished in Medicare and
Medicaid Cost Reports to fulfill other government obligations and serve
as a basis for reimbursement, a practice that provides an additional
check on accuracy.
This proposed rule also amends the reporting requirements with
respect to facilities insured under Section 232, by specifying that the
financial statements being submitted to HUD must be concurrently
submitted to the servicing lender. Given the servicing lenders'
responsibilities with respect to risk mitigation of their residential
care facility portfolio, and given the difficulty that some lenders
have in obtaining financial data related to the facility, it is
appropriate that the lenders be timely provided the same financial data
(of the owner entity, as well as the operator entity) that HUD is
requiring borrowers and operators to routinely provide to HUD. Both
owner and operator financial reporting requirements would apply
beginning with the year in which the final rule following this proposed
rule becomes effective.
C. Introduction to FHA Programs: Physical Condition of Multifamily
Properties (Part 200, Subpart P)
Section 200.855(c) of HUD's regulations (24 CFR 200.855(c)), which
addresses timing of inspections, would narrow and streamline the scope
of Section 232 facilities that are routinely inspected by the Real
Estate Assessment Center (REAC). In particular, facilities such as
assisted living facilities and board and care facilities would be
subject to routine REAC inspections unless the state or local
government had a reliable and adequate inspection system in place. The
remainder of the Section 232 properties, and properties that are
routinely surveyed pursuant to regulations of the Centers for Medicare
and Medicaid Services, would be inspected only when and if HUD
determined, on a case-by-case basis and on the basis of information
received, that inspection of such facility is needed to assure
protection of residents or the adequate preservation of the project.
This amendment would help assure that facilities surveyed frequently by
state regulatory agencies, for physical condition matters related to
resident care and safety, are not subject to duplicative inspections.
HUD- and FHA-approved mortgagees now have ready electronic access to
the results of state agency inspections conducted pursuant to
requirements of the Centers for Medicare and Medicaid Services.
D. Multifamily Housing Mortgage Insurance (Part 207)
Contract Rights and Obligations (Subpart B)
Subpart B of the part 232 regulations addresses contract rights and
obligations and the rights and duties of the mortgagee under the
contract of insurance.
HUD is taking this opportunity to make changes to HUD's regulations
in this subpart affecting the Section 232 programs. These proposed
changes alter several of the amendments to the multifamily regulations
adopted last spring. (See 76 FR 24363 May 11, 2011, HUD Multifamily
Rental Projects: Regulatory Revisions.)
[[Page 26223]]
Section 207.255, ``Defaults for purposes of insurance claim,''
includes language defining the date of defaults. This proposed rule
revises Sec. 207.255(a)(4) by clarifying the dates on which certain
monetary and other defaults occur.
This proposed rule modifies Sec. 207.258, ``Insurance claim
requirements,'' by deleting in paragraph (a)(2) a parenthetical
expression.
This proposed rule also modifies Sec. 207.258(b)(1)(i) by
clarifying the time period within which a mortgagee may elect to assign
a mortgage to the Commissioner.
E. Costs and Benefits of Proposed Revisions to the Section 232 Program
Regulations
As discussed in this preamble, this proposed rule updates HUD's
Section 232 program regulations similar to the 2011 updates that were
made to HUD's multifamily rental project regulations and accompanying
closing documents. The revisions proposed by this rule update the
Section 232 regulations to reflect existing practices in financing and
refinancing healthcare facilities, and to decrease risk to the program
due to outdated regulations and the need for greater accountability by
healthcare facility operators. Key changes highlighted in the preamble
include requiring borrowers to establish a long term debt-service
reserve account, requiring operators to submit quarterly and year-to-
date self-certified financial reports, and reducing duplicative
physical inspections.
The valued benefits from fewer physical inspections, and the costs
from increased financial reporting and the opportunity cost of the debt
service reserve fund, each total less than $1 million. Unvalued
benefits include uninterrupted services of healthcare facilities, which
otherwise would close due to foreclosure. Transfers from avoided claim
payments total $13 million. The total costs, benefits, and transfers of
this rule will not in any year exceed the $100 million threshold set by
Executive Order 12866 (Regulatory Planning and Review). Therefore, the
rule is not economically significant.
The risk mitigation requirements proposed by this rule are
necessary due to the combination of two particular risks facing
healthcare facilities. First, similar to multifamily residential
properties, the owner usually relies on a separate entity to operate
the facility. The performance of the operator is crucial to the
mortgagor's ability to repay the mortgage. Since the operator may not
be known to FHA at the time of underwriting, or may change during the
term of the mortgage, the risk of operator deficiency is difficult to
assess. Second, unlike residential or other commercial properties, the
value of a poorly maintained and operated facility can decrease
dramatically because the building was designed specifically for
healthcare use and may not retain the mortgaged value at resale due to
a lack of alternative uses. Thus, FHA may face more uncertainty when
selling foreclosed healthcare properties than foreclosed residential
properties. This rule therefore proposes requirements intended to
identify operator deficiencies earlier and ensure that funds are
available if financial problems arise.
The rule also proposes to require the borrower to establish a long-
term debt service reserve fund. Although FHA currently requires owners
of new construction projects to maintain a reserve fund until
sustainable occupancy is reached, usually one to two years, this new
requirement would require a reserve fund to be maintained throughout
the life of the mortgage and used in case of operator deficiency. Of
the 30 insurance claims from 2009 to mid-2011, operator deficiencies
played a role in the property's performance demise in 23. Further,
these claims were distributed widely over age of loan, not simply in
the first few years, indicating the need for a reserve fund over the
life of the mortgage. The maintenance of a reserve is to decrease the
number of nonperforming mortgages by providing additional time to
resolve operator deficiencies.
Based on FHA's experience, a reserve fund can be an important
source for debt service payments during a period of instability. Thus,
the reserve can delay the point at which a lender finds it necessary to
file a claim, providing extra time for the parties to restructure and
stabilize a project and avoid a claim to HUD. FHA has accepted claims
where borrowers were pursuing workouts, but stability could not be
achieved prior to the lenders' expenses becoming too burdensome to
sustain. The extra time afforded by a debt service reserve makes
avoiding a claim more likely under such scenarios. In its analysis of
2009, 2010, and early 2011 claims, HUD found that 5 out of 30 projects
brought to claim may have benefited from the additional time provided
by a debt service reserve. Finally, as an additional offset for
borrowers to the added requirement of debt service reserve, the rule
also provides greater flexibility to borrowers in the making of
distributions and use of surplus cash. Assuming that, as a result of
the rule, 2 fewer claims were paid annually, FHA would save $13 million
per year, if projected based on the average unpaid balance (UPB) of
assigned Section 232 mortgages from 2009-2011, which was $6.5 million.
In the absence of these claim payments, FHA could pass these savings on
to its mortgagors and thus such savings are best viewed as a transfer
between borrowers.
The amount of funds required to be initially placed in the debt
service reserve fund, and the minimum long-term balance, will be
determined during underwriting. FHA estimates that on average, a
borrower's monthly debt service will increase by approximately 1.5
percent. Based on an expected average of $3.4 billion annually in the
value of new mortgage endorsements, borrowers would be required, in
aggregate, to place and maintain $51 million in the fund. The cost to
borrowers is the lower return from restricting this amount to the
reserve fund compared to other investment options. This opportunity
cost of holding these funds in a reserve account is, therefore,
calculated as the difference between the average market rate of return
and the risk-free interest rate. The average market rate is represented
by the real annualized return of the S&P 500 between 1990 and 2011,
which equals 5.37 percent. The risk-free interest rate is the average
10-year Treasury rate between 1990 and 2011, which equals 2.6 percent.
The opportunity cost of holding the estimated funds in a reserve fund
totals $141,270.
This rule also requires operators to submit annual and year-to-date
financial reports. Currently, the borrower, but not the operator, is
required to provide audited financial statements. Although submission
of the operator's financial reports is a new requirement, the expense
of such reports is mitigated by allowing the operator to submit self-
certified, rather than audited statements. Moreover, the required
operator financial information is data that operators need to maintain
in the normal course of business in order to monitor and manage their
own operations effectively. FHA estimates this will require
approximately 10,000 employee hours annually to prepare and submit
these reports (2,500 respondents, 4 reports per year and 1 hour to
generate each report). The median wage of the employees who prepare
these reports is approximately $75 per hour. Thus, the total cost of
complying with this requirement would be $750,000.
Finally, this rule exempts facilities from FHA physical inspection
requirements if they are inspected by
[[Page 26224]]
state or local agencies in order to eliminate duplicative inspections.
FHA estimates that, as a result, approximately 1,391 inspections would
be avoided per year. The estimated cost per inspection totals $475,
which would mean a total annual inspection savings of $660,725.
In addition to the valued benefits, this rule also provides
benefits that are less easily quantified. As explained above, HUD
expects the reserve fund and financial reporting requirements to
decrease the number of claims paid. While some troubled facilities may
be stabilized and continue operating, at this stage of delinquency,
they are often forced to close. Thus, there is a disruption of
healthcare services to the community and costs to moving residents from
one facility to another. In smaller communities, there are fewer
alternatives for facility residents, and the benefits of avoiding
foreclosure are greater as residents may be without needed services for
a long period. In larger cities, existing facilities may be able to
absorb the additional demand fairly quickly. In both of these cases,
however, residents bear costs associated with transferring between
facilities. Although the avoided loss or interruption of services is
difficult to quantify and varies by city, the avoided loss or
interruption of services is an important benefit that this rule is
trying to achieve.
Summary of Valued Annual Benefits, Costs, and Transfers
----------------------------------------------------------------------------------------------------------------
Benefits Costs Transfers
----------------------------------------------------------------------------------------------------------------
Debt Service Reserve Fund.................................... $660,725 $141,270 $13,000,000
Financial Reporting.......................................... ............... 750,000 ...............
Physical Inspections.........................................
--------------------------------------------------
Total.................................................... 660,725 891,270 13,000,000
----------------------------------------------------------------------------------------------------------------
III. Findings and Certifications
Executive Order 13563, Regulatory Review
The President's Executive Order (EO) 13563, entitled ``Improving
Regulation and Regulatory Review,'' was signed by the President on
January 18, 2011, and published on January 21, 2011, at 76 FR 3821.
This EO requires 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.'' Section 4 of the EO, entitled ``Flexible
Approaches,'' provides, in relevant part, that where relevant,
feasible, and consistent with regulatory objectives, and to the extent
permitted by law, each agency shall identify and consider regulatory
approaches that reduce burdens and maintain flexibility and freedom of
choice for the public. As discussed earlier in this preamble, the
Section 232 regulations have not been updated since 1996. HUD submits
that the changes proposed by this rule to the Section 232 regulations
are consistent with the EO's directions. As the preceding section
discussed, the changes proposed by this rule will modernize the Section
232 program, reduce burden by eliminating duplicative physical
inspections, providing flexibility to borrowers in the making of
distributions and use of surplus cash, and increasing accountability to
strengthen the program, thereby helping it ensure that it remains
viable for the financing of healthcare facilities.
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.
This rule is directed to creating transparency in HUD's Section 232
program by, codifying existing and longstanding provisions imposed on a
Section 232 borrower, and strengthening this program through stronger
risk management practices, such as making operators more accountable
for their role in administering Section 232 healthcare facilities. As
noted under the discussion of EO 13563, this rule proposes amendments
that will enhance HUD's oversight ability, while minimizing the burdens
on private actors, to the benefit of participants and facility clients.
Additionally, by clarifying and codifying existing requirements, the
rule makes it easier for borrowers and operators to comply with their
legal obligations. Through this rule, the viability of the Section 232
program and HUD's enforcement authority are increased, and waste,
fraud, and abuse are reduced.
Approximately 3,343 of the anticipated annual participants in the
Section 232 program are small entities, including approximately 2,500
entities involved in nursing homes, 725 entities involved in assisted
living facilities, and 70 other entities. (The total figure exceeds the
number of facilities involved, because a single transaction many
involve distinct legal entities serving as the operator and owner.) The
changes required by this rule do not impose significant economic
impacts on these small entities or otherwise adversely
disproportionately burden such small entities. The reporting
requirements of this rule have been tailored to complement normal
business accounting practices. Accordingly, the undersigned certifies
that this 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 effect 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 this preamble.
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)). That finding is available for
public inspection between the hours of 8 a.m. and 5 p.m. weekdays in
the Regulations Division, Office of General Counsel, Department of
Housing and Urban Development, 451 Seventh Street SW., Room 10276,
Washington, DC 20410-0500. Due to security measures at the HUD
Headquarters building, please schedule an appointment to review the
finding by calling the Regulations Division at 202-402-3055 (this is
not a toll-free number). Individuals with speech or hearing impairments
may access this
[[Page 26225]]
number via TTY by calling the Federal Relay Service at 800-877-8339.
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either: (1) Imposes substantial direct compliance costs on state and
local governments and is not required by statute, or (2) preempts state
law, unless the agency meets the consultation and funding requirements
of section 6 of the Executive Order. This rule will 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.
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 does
not impose any federal mandates on any state, local, or tribal
governments, or on the private sector, within the meaning of UMRA.
Information Collection Requirements
The information collection requirements contained in this proposed
rule have been submitted to the Office of Management and Budget (OMB)
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). In
accordance with the Paperwork Reduction Act, 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 OMB
control number.
The burden of the information collections in this proposed rule is
estimated as follows:
Reporting and Recordkeeping Burden
----------------------------------------------------------------------------------------------------------------
Estimated
Number of average time Estimated
Section reference Number of responses per for annual burden
respondents respondent requirement (in hours)
(in hours)
----------------------------------------------------------------------------------------------------------------
24 CFR 5.801(c)(4) Financial information........ 2,500 4 1 10,000
24 CFR 232.11 HUD written approval.............. 100 1 1 100
24 CFR 232.1005 HUD written approval............ 25 1 1 25
24 CFR 232.1007 HUD approval.................... 25 1 1 25
24 CFR 232.1009 HUD written approval............ 50 1 1 50
24 CFR 232.1011 Financial statement............. 2,500 1 60 150,000
24 CFR 232.1013 Specifications for lease 25 1 1 25
agreement, HUD written approval................
24 CFR 232.1015 HUD written approval............ 25 1 1 25
24 CFR 232.1017 HUD written approval............ 25 1 1 25
24 CFR 232.1019 HUD written approval............ 1,750 2 .50 1,750
---------------------------------------------------------------
Totals...................................... 7,025 14 68.5 162,025
----------------------------------------------------------------------------------------------------------------
In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments
from members of the public and affected agency concerning this
collection of information to:
(1) Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of HUD, including
whether the information will have practical utility;
(2) Evaluate the accuracy of HUD's estimate of the burden of the
proposed collection of information;
(3) Enhance the quality, utility, and clarity of the information to
be collected; and
(4) Minimize the burden of the collection of information on those
who are to respond, including through the use of appropriate automated
collection techniques or other forms of information technology; e.g.,
permitting electronic submission of responses.
Interested persons are invited to submit comments regarding the
information collection requirements in this rule. Comments must refer
to the proposal by name and docket number (FR-5465-P-01) and must be
sent to:
HUD Desk Officer, Office of Management and Budget, New Executive
Office Building, Washington, DC 20503. Fax number: 202-395-6947. and
Reports Liaison Officer, Office of Housing, Department of Housing
and Urban Development, 451 Seventh Street SW., Room 9116, Washington,
DC 20410-8000.
Interested persons may submit comments regarding the information
collection requirements electronically through the Federal eRulemaking
Portal at http://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 public. Comments submitted electronically
through the http://www.regulations.gov Web site 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.
List of Subjects
24 CFR Part 5
Administrative practice and procedure, Aged, Claims, Grant
programs--housing and community development, Individuals with
disabilities, Intergovernmental relations, Loan programs--housing and
community development, Low and moderate income housing, Mortgage
insurance, Penalties, Pets, Public housing, Rent subsidies, Reporting
and recordkeeping requirements, Social Security, Unemployment
compensation, Wages.
24 CFR Part 200
Administrative practice and procedure, Claims, Equal employment
opportunity, Fair housing, Home improvement, Housing standards, Lead
poisoning, Loan programs--housing and community development, Mortgage
insurance, Organization and functions (Government agencies), Penalties,
Reporting and recordkeeping.
24 CFR Part 207
Mortgage insurance--Nursing homes, Intermediate care facilities,
Board and
[[Page 26226]]
care homes, and Assisted living facilities.
24 CFR Part 232
Fire prevention, Health facilities, Loan programs--health, Loan
programs--housing and community development, Mortgage insurance,
Nursing homes, Reporting and recordkeeping requirements.
Accordingly, parts 5, 200, 207, and 232 of title 24 of the Code of
Federal Regulations are proposed to be amended as follows:
PART 5--GENERAL HUD PROGRAM REQUIREMENTS; WAIVERS
1. The authority citation for 24 CFR part 5 continues to read as
follows:
Authority: 42 U.S.C. 1437a, 1437c, 1437d, 1437f, 1437n, 3535(d),
and Sec. 327, Pub. L. 109-115, 119 Stat. 2936.
2. Amend Sec. 5.801 to:
a. Add paragraph (a)(6),
b. Revise the first sentence of the introductory text of paragraph
(b),
c. Add paragraph (b)(4),
d. Revise the heading of paragraph (c),
e. Add paragraph (c)(4), and
f. Add paragraph (d)(4) to read as follows:
Sec. 5.801 Uniform financial reporting standards.
(a) * * *
(6) Operators of projects with mortgages insured or held by HUD
under section 232 of the Act (Mortgage Insurance for Nursing Homes,
Intermediate Care Facilities, Board and Care Homes).
(b) Entities (or individuals) to which this subpart is applicable
must provide to HUD such financial information as required by HUD. Such
information must be provided on an annual basis, except as required
more frequently under paragraph (c)(4) of this section. * * *
* * * * *
(4) With respect to financial reports relating to properties
insured under Section 232 of the Act, concurrently with submitting the
information to HUD, this information must also be submitted to the
mortgagee in a format and manner prescribed by the Secretary.
(c) Filing of financial reports. * * *
* * *
(4) For entities listed in paragraph (a)(6) of this section, the
financial information to be submitted to HUD in accordance with
paragraph (b) of this section must be submitted to HUD on a quarterly
and fiscal-year-to-date basis, within 30 days of the end of each
quarterly reporting period. The financial statements submitted pursuant
to paragraph (a)(6) of this section may, at the operator's option, be
operator-certified rather than audited, provided, however, that if the
operator is also the borrower, then that entity's obligation to submit
an annual audited financial statement within 90 days of its fiscal year
end (in addition to its obligation as an operator to submit financial
information on a quarterly and year-to-date basis) remains and is not
obviated. Additionally, if HUD has reason to believe that a particular
operator's operator-certified statements may be unreliable or are
presented in a manner that is inconsistent with Generally Accepted
Accounting Principles, HUD may, on a case-by-case basis, require
audited financial statements from the operator. Additionally, with
respect to facilities with FHA-insured or HUD-held Section 232
mortgages, HUD may request more frequent financial statements from the
borrower, as specified under (a)(4)(x), and/or the operator on a case-
by-case basis when the circumstances warrant. Nothing in the
regulations in this section limits HUD's ability to obtain further or
more frequent information when appropriate pursuant to the applicable
regulatory agreement.
(d) * * *
(4) Entities described in paragraph (a)(6) of this section must
comply with the requirements of this section with respect to fiscal
years ending [a date of one year after the effective date of the final
rule to be inserted at the final rule stage] and later.
* * * * *
PART 200--INTRODUCTION TO FHA PROGRAMS
3. The authority citation for part 200 continues to read as
follows:
Authority: 12 U.S.C. 1702-1715-z-21; 42 U.S.C. 3535(d).
4. In 200.855, add a new paragraph (c)(5) to read as follows:
Sec. 200.855 Physical condition standards and physical inspection
requirements.
* * * * *
(c) * * *
(5)(i) For Assisted Living Facilities and Board and Care
Facilities, the initial inspection required under this subpart will be
conducted within the same time restrictions set forth in paragraph
200.855(c)(4) immediately above, and any further inspections will be
conducted at a frequency determined consistent with Sec. 200.857, and
(ii) For any other Section 232 facilities, the inspection will be
conducted only when and if HUD determines, on the basis of information
received, such as through a complaint, site inspection, or referral by
a state agency, on a case-by-case basis, that inspection of a
particular facility is needed to assure protection of the residents or
the adequate preservation of the project.
PART 207--MULTIFAMILY HOUSING MORTGAGE INSURANCE
5. The authority citation for part 207 continues to read as
follows:
Authority: 12 U.S.C. 1701z-11(e), 1713, and 1715b; 42 U.S.C.
3535(d).
6. In Sec. 207.255(a)(4) introductory text, remove the reference
to ``paragraph (b)'' and add in its place a reference to ``paragraph
(a)''.
7. In Sec. 207.258 revise paragraphs (a)(2) introductory text and
(b)(1)(i) to read as follows:
Sec. 207.258 Insurance claim requirements.
(a) * * *
(2) For mortgages funded with the proceeds of state or local bonds,
GNMA mortgage-backed securities, participation certificates, or other
bond obligations specified by the Commissioner (such as an agreement
under which the insured mortgagee has obtained the mortgage funds from
third-party investors and has agreed in writing to repay such investors
at a stated interest rate and in accordance with a fixed repayment
schedule), any of which contains a lock-out or prepayment premium, the
mortgagee must, in the event of a default during the term of the
prepayment lock-out or prepayment premium:
* * * * *
(b) * * *
(1) * * *
(i) If the mortgagee elects to assign the mortgage to the
Commissioner, the mortgagee shall, at any time within 30 days after the
date HUD acknowledges the notice of election, file its application for
insurance benefits and assign to the Commissioner, in such manner as
the Commissioner may require, any applicable credit instrument and the
realty and chattel security instruments.
* * * * *
PART 232--MORTGAGE INSURANCE FOR NURSING HOMES, INTERMEDIATE CARE
FACILITIES, BOARD AND CARE HOMES, AND ASSISTED LIVING FACILITIES
8. The authority citation for 24 CFR part 232 continues to read as
follows:
Authority: 12 U.S.C. 1715b, 1715w; 42 U.S.C. 3535(d).
[[Page 26227]]
9. Throughout part 232, the word ``mortgagor'' is revised to read
``borrower'' wherever it appears.
10. Revise Sec. 232.1 to read as follows:
Sec. 232.1 Eligibility requirements.
All of the requirements, except Sec. 200.5, set forth in 24 CFR
part 200 subpart A, apply to project mortgages insured under Section
232 of the National Housing Act (12 U.S.C. 1715w), as amended.
11. Redesignate Sec. 232.3 as Sec. 232.7 and add a new Sec.
232.3 to read as follows:
Sec. 232.3 Eligible borrower.
For mortgages originated after [a date of one year after the
effective date of the final rule to be inserted at the final rule
stage], the borrower shall be a single asset entity acceptable to the
Commissioner, as limited by the applicable section of the Act, and
shall possess the powers necessary and incidental to operating the
project, except that the Commissioner may approve a non-single asset
borrower entity under such circumstances, terms, and conditions
determined and specified as acceptable to the Commissioner.
12. Add new Sec. Sec. 232.9 and 232.11 to read as follows:
Sec. 232.9 Mortgaged property.
Mortgaged property includes all of Borrower's interests in
property, real, personal, or mixed, covered by the mortgage or
mortgages securing the note endorsed for insurance or held by the
Secretary, as further defined in the mortgage documents.
Sec. 232.11 Establishment and maintenance of long-term debt service
reserve account.
To be eligible for insurance under this part, and except with
respect to Supplemental Loans to Finance Purchase and Installation of
Fire Safety Equipment (subpart C of this part), the borrower must
establish at final closing and maintain throughout the term of the
mortgage a long-term debt service reserve account. This long-term debt
service reserve account may be financed as part of the initial mortgage
amount, provided that the maximum mortgage amount as otherwise
calculated is not thereby exceeded. The amount required to be initially
placed in the long-term debt service reserve account and the minimum
long-term balance to be maintained in that account will be determined
during underwriting and separately identified in the firm commitment.
Although HUD may, when appropriate to avert a mortgage insurance claim,
permit the balance to fall below the required minimum long-term
balance, the borrower may not take any distribution of mortgaged
property except when both the long-term debt service reserve account is
funded at the minimal long-term level and such distribution is
otherwise permissible.
Subpart B--Contract Rights and Obligations
13. Revise Sec. 232.251 to read as follows:
Sec. 232.251 Other applicable regulations.
(a) Cross-reference. (1) All of the provisions, except Sec.
207.258b, of 24 CFR part 207, subpart B, relating to mortgages insured
under section 207 of the National Housing Act, apply to mortgages
insured under section 232 of the Act.
(2) For the purposes of this subpart, all references in 24 CFR part
207 to section 207 of the Act shall be construed to refer to section
232 of the Act.
(3) Unless otherwise specified in this part, the regulations in
this subpart B apply to all mortgages insured under section 232 of the
Act.
(b) [Reserved]
14. Add new Sec. Sec. 232.254 and 232.256, to read as follows:
Sec. 232.254 Withdrawal of project funds, including for repayments of
advances from the borrower, operator, or management agent.
(a) General. Borrower may make and take distributions of mortgaged
property, as set forth in the mortgage loan transactional documents, to
the extent and as permitted by the law of the applicable jurisdiction,
provided that, upon each calculation of borrower surplus cash, which
calculation shall be made no less frequently than semi-annually,
borrower must demonstrate positive surplus cash, or to the extent
surplus cash is negative, repay any distributions taken during such
calculation period within 30 days or within such shorter period as may
be required by HUD. Borrower shall be deemed to have taken
distributions to the extent that surplus cash is negative unless, in
conjunction with the calculation of surplus cash, borrower provides to
HUD documentation evidencing, to HUD's reasonable satisfaction, a
lesser amount of total distributions. To the extent that the provisions
of this paragraph (a) are inconsistent with the provisions in a
borrower's existing transactional loan documents, including without
limitation any HUD-required regulatory agreement, the provisions of the
transactional loan documents shall apply.
(b) Definition. Borrower surplus cash means any cash remaining in
the Borrower's accounts after:
(1) The payment of:
(i) All sums due or currently required to be paid under the terms
of any mortgage or note insured or held by the Secretary;
(ii) All amounts required to be deposited in the project's reserve
fund for replacements, long-term debt service reserve account, or
residual receipts account; and
(iii) All project obligations of the borrower other than the
insured mortgage, unless funds for payment are set aside or deferment
of payment has been approved by the Secretary; and
(2) The segregation of:
(i) An amount equal to the aggregate of all special funds required
to be maintained by the project, including the long-term debt service
escrow account;
(ii) Any tenant security deposits held; and
(iii) All other accrued items payable by borrower within 30 days
after the end of the annual or semi-annual fiscal period for which
surplus cash is calculated.
Sec. 232.256 Leases.
A borrower may not lease any portion of the project or enter into
any other agreement with an operator without HUD's prior written
consent.
15. Revise the introductory text of Sec. 232.903, and Sec.
232.903(c) and (d) to read as follows:
Sec. 232.903 Maximum mortgage limitations.
Notwithstanding the maximum mortgage limitations set forth in Sec.
200.15 of this chapter, a mortgage within the limits set forth in this
section shall be eligible for insurance under this subpart.
* * * * *
(c) Project to be refinanced--additional limit. (1) In addition to
meeting the requirements of paragraphs (a) and (b) of this section, if
the Project is to be refinanced by the insured mortgage, the maximum
mortgage amount must not exceed the cost to refinance the existing
indebtedness. For the purposes of this requirement:
(i) The Project shall not have changed ownership, or
(ii) The Project shall have been sold to a purchaser who has an
identity of interest with the seller (as defined by the Commissioner).
(2) The existing indebtedness will consist of the following items,
the eligibility and amounts of which must be determined by the
Commissioner:
(i) The amount required to pay off the existing indebtedness;
[[Page 26228]]
(ii) The amount of the initial deposit for the reserve fund for
replacements;
(iii) Reasonable and customary legal, organization, title, and
recording expenses, including mortgagee fees under Sec. 232.15;
(iv) The estimated repair costs, if any;
(v) Architect's and engineer's fees, municipal inspection fees, and
any other required professional or inspection fees;
(vi) The amount of any debt service reserve account required by the
Commissioner.
(d) Project to be acquired--additional limit. In addition to
meeting the requirements of paragraphs (a) and (b) of this section, if
the project is to be acquired by the borrower and the purchase price is
to be financed with the insured mortgage, the maximum amount must not
exceed 85 percent for a profit-motivated borrower and 90 percent for a
private nonprofit borrower of the cost of acquisition as determined by
the Commissioner. The cost of acquisition shall consist of the
following items, to the extent that each item (except for item numbered
(1)) is paid by the purchaser separately from the purchase price. The
eligibility and amounts of these items must be determined in accordance
with standards established by the Commissioner.
(1) Purchase price is indicated in the purchase agreement;
(2) An amount for the initial deposit to the reserve fund for
replacements;
(3) Reasonable and customary legal, organizational, title, and
recording expenses, including mortgagee fees under Sec. 232.15;
(4) The estimated repair cost, if any;
(5) Architect's and engineer's fees, municipal inspection fees, and
any other required professional or inspection fees;
(6) The amount of any debt service reserve account required by the
Commissioner.
16. Add new subpart F to read as follows:
Subpart F--Eligible Operators and Facilities and Restrictions on Fund
Distributions
Sec.
232.1001 Scope.
232.1003 Definitions.
232.1005 Treatment of project operating accounts.
232.1007 Operating expenses.
232.1009 Payments to borrower principals prohibited.
232.1011 Financial reports.
232.1013 Leases.
232.1015 Management agents.
232.1017 Restrictions on deposit, withdrawal, and distribution of
funds, and repayment of advances.
232.1019 Prompt notification to HUD and mortgagee of circumstances
placing the value of the security at risk.
Subpart F--Eligible Operators and Facilities and Restrictions on
Fund Distributions
Sec. 232.1001 Scope.
This subpart establishes requirements applicable to the operators
of healthcare facilities and the facilities under this part.
Sec. 232.1003 Definitions.
The following definitions apply throughout this part.
Identity-of-interest projects refers to those projects that are
operated by a licensed operator and/or managed by a management agent
who shares an identity of interest with the ownership entity.
Management agent means an entity that, pursuant to a contract with
the operator or borrower, manages matters related to the project,
subject to limitations set forth in Sec. 232.1015.
Operator means a single asset entity acceptable to the
Commissioner, and shall possess the powers necessary and incidental to
operating the healthcare facility, except that the Commissioner may
approve a non-single asset entity under such circumstances, terms, and
conditions determined and specified as acceptable to the Commissioner.
Owner operator means an owner who operates its own project and does
not lease the project or otherwise contract with an eligible operator.
In that instance, the borrower entity and the operating entity are the
exact same legal entity, and the owner operator must comply with
regulatory provisions governing the use of funds for both operators and
borrowers in Sec. 232.254, Sec. 232.1005, and Sec. 232.1017.
Project means any and all assets of whatever nature or wherever
situated related to the insured mortgage loan, including without
limitation the mortgaged property, any site improvements, and any
collateral owned by operators securing the insured mortgage loan.
Sec. 232.1005 Treatment of project operating accounts.
(a) All accounts deriving from the operation of the property,
including operator accounts and including all funds received from any
source or derived from the operation of the facility, are project
assets subject to control under the insured mortgage loan's
transactional documents, including, without limitation, the operator's
regulatory agreement. Funds generated by the operation of the
healthcare facility shall be deposited into a federally insured bank
account in the name of the single asset operator of the facility,
provided that an account held in an institution acceptable to the
Government National Mortgage Association may have a balance that
exceeds the amount to which such insurance is limited. If the borrower
is not also the operator, any of owner's project-related funds shall be
deposited into a federally insured bank account in the name of the
single asset borrower.
(b) An operator must not allow funds attributable to the healthcare
facility to be commingled with funds attributable to another healthcare
facility or any other business unless approved by HUD. Any centralized
accounting system involving project funds must have prior HUD approval
and must clearly delineate which portion of the funds in an account are
attributable to the particular facility.
(c) Except to the extent that the healthcare facility maintains
positive working capital, an operator may not advance or otherwise use
funds attributable to the operator's business at a project under this
part to pay expenses attributable to any other project or business
without the advance written approval of HUD.
Sec. 232.1007 Operating expenses.
Goods and services purchased or acquired in connection with the
Project shall be reasonable and necessary for the operation or
maintenance of the Project, and the costs of such goods and services
incurred by the borrower or operator shall not exceed amounts normally
paid for such goods or services in the area where the services are
rendered or the goods are furnished, except as otherwise approved by
HUD.
Sec. 232.1009 Payments to borrower principals prohibited.
No principal of the borrower entity may receive a salary or any
payment of funds derived from operation of the project, other than from
permissible distributions, except as approved by HUD.
Sec. 232.1011 Financial reports.
Within 90 days following the end of each entity's fiscal year, the
borrower must provide HUD an audited annual financial report based on
an examination of its books and records, in such form and substance
required by HUD in accordance with 24 CFR 5.801 and 200.36. Operators
must submit financial statements quarterly within 30 days of the date
of the end of each fiscal quarter, setting forth both quarterly and
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fiscal year-to-date information in accordance with 24 CFR 5.801(c)(4).
Sec. 232.1013 Leases.
Except to enter into resident agreements in the standard course of
operating the healthcare facility, an operator may not lease or
sublease any portion of the project without HUD's prior written
approval.
Sec. 232.1015 Management agents.
(a) An operator or borrower may, with the prior written approval of
HUD, execute a management agent agreement setting forth the duties and
procedures for matters related to the management of the project. Both
the management agent and the management agent agreement must be
acceptable to HUD and approved in writing by HUD.
(b) An operator or borrower may not enter into any agreement that
provides for a management agent to have rights to or claims on funds
owed to the operator.
(c) Management agent fees may not be renegotiated without HUD's
written approval once the management agent agreement has been executed.
(d) HUD may approve an identity of interest between a management
agent and a borrower or operator only to the extent that the goods and
services provided benefit the project and if the operator clearly
establishes that the amounts paid to the identity-of-interest
management agent for goods and services provided to the healthcare
facility are not in excess of amounts that would be charged by an
independent management agent.
Sec. 232.1017 Restrictions on deposit, withdrawal, and distribution
of funds, and repayment of advances.
(a) Deposit of funds. An operator must deposit all revenue the
operator receives directly or indirectly in connection with the
operation of the healthcare facility in a separate, segregated account.
The account must be with a financial institution whose deposits are
insured by an agency of the Federal Government, provided that an
account held in an institution acceptable to the Government National
Mortgage Association may have a balance that exceeds the amount to
which such insurance is limited.
(b) Withdrawals of funds. Operators, whether or not an operator is
also the borrower, shall at all times maintain positive working capital
for the healthcare facility. If a quarterly financial statement,
required pursuant to Sec. 232.1011, demonstrates negative working
capital for the healthcare facility, the operator must cure such
violation or HUD may pursue such remedies as set forth in the insured
mortgage loan's transactional documents.
Sec. 232.1019 Prompt notification to HUD and mortgagee of
circumstances placing the value of the security at risk.
(a) HUD and the mortgagee shall be informed of any notification of
any failure to comply with governmental requirements including the
following:
(1) The licensed operator of a project shall promptly provide the
mortgagee and HUD with a copy of any notification that has placed the
licensure, a provider funding source, and/or the ability to admit new
residents at risk, and any responses to those notices, provided that
HUD may determine certain information to be exempt from this
requirement based upon severity level. Such required information shall
include, but is not limited to, the following types of notices and
responses:
(i) The operator shall deliver to HUD and the mortgagee
electronically, within 48 hours after the date of receipt, copies of
any and all notices, reports, surveys, and other correspondence
(regardless of form) received by the operator from any governmental
authority that includes any statement, finding, or assertion that:
(A) The operator or the project is or may be in violation of (or
default under) any of the permits and approvals or any governmental
requirements applicable thereto;
(B) Any of the permits and approvals is to be terminated, limited
in any way, or not renewed;
(C) Any civil money penalty (other than a de minimis amount) is
being or may be imposed; or
(D) The operator or the project is subject to any governmental
investigation or inquiry involving fraud.
(ii) The operator shall also deliver to HUD and the mortgagee,
simultaneously with delivery to any governmental authority, any and all
responses given by or on behalf of the operator to any of the foregoing
and shall provide to HUD and the mortgagee, promptly upon request, such
additional information relating to any of the foregoing as HUD or the
mortgagee may request. The receipt by HUD and/or the mortgagee of
notices, reports, surveys, correspondence, and other information shall
not in any way impose any obligation or liability on HUD, the
mortgagee, or their respective agents, representatives, or designees to
take (or refrain from taking) any action; and HUD, the mortgagee, and
their respective agents, representatives, and designees shall have no
liability for any failure to act thereon or as a result thereof.
(2) The operator shall provide additional and ongoing information
as requested by the borrower, mortgagee, or HUD pertaining to matters
related to that risk. Controlling documents between or among any of the
parties may provide further requirements with respect to such
notification and communication.
(b) This section is applicable to all operators on the effective
date of this regulation.
Dated: April 12, 2012.
Carol J. Galante,
Acting Assistant Secretary for Housing--Federal Housing Commissioner .
[FR Doc. 2012-10690 Filed 5-2-12; 8:45 am]
BILLING CODE 4210-67-P