[Federal Register Volume 77, Number 131 (Monday, July 9, 2012)]
[Proposed Rules]
[Pages 40310-40314]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-16559]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 232
[Docket No. FR-5537-P-01]
RIN-2502-AJ04
Federal Housing Administration (FHA) Section 232 Healthcare
Mortgage Insurance Program: Partial Payment of Claims
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Proposed rule.
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SUMMARY: This proposed rule would amend the regulations governing FHA's
Section 232 Healthcare Mortgage Insurance program (Section 232
program). The 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. The amendments proposed by this rule
would reduce risk to the FHA insurance fund by establishing the
criteria and process by which FHA will accept and pay a partial payment
of the claim under the FHA mortgage insurance contract. Through
acceptance and payment of a partial payment of claim, FHA pays the
lender a portion of the unpaid principal balance and recasts a portion
of the mortgage under terms and conditions determined by FHA, as an
alternative to the lender assigning the entire mortgage to HUD. Partial
payment of claim would also allow FHA insured healthcare projects to
continue operating and providing services.
DATES: Comment Due Date: September 7, 2012.
ADDRESSES: Interested persons are invited to submit comments regarding
[[Page 40311]]
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.
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 appointment to review the public comments must be
scheduled in advance 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 800-877-8339. Copies of all comments submitted
are available for inspection and downloading at www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Roger E. Miller, Deputy Assistant
Secretary, Office of Healthcare Programs, Office of Housing, Department
of Housing and Urban Development, 451 7th Street SW., Room 6264,
Washington, DC 20410-8000; telephone 202-708-0599 (this is not a toll-
free number). Persons with hearing or speech disabilities may access
this number through TTY by calling the toll-free Federal Relay Service
at 1-800-877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
FHA'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. A project may include more than one type of
facility and financing, and a combination of these uses is acceptable.
The Section 232 program is authorized under the National Housing Act
(12 U.S.C. 1715w). HUD's regulations for the Section 232 program are
codified in 24 CFR part 232. While many aspects of HUD's healthcare
facility operations, including the basic contract and eligibility
requirements, are governed by the regulations applicable to HUD's
multifamily mortgage insurance programs, separate healthcare
regulations have been adopted to address program operations specific to
healthcare facilities, such as state licensing requirements.\1\
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\1\ The regulations codified at 24 CFR part 200 (entitled
``Introduction to FHA programs'') set forth, in a single location of
the Code of Federal Regulations, requirements that are generally
applicable to FHA programs. The regulations at 24 CFR 232.2 require
that facilities meet state licensing requirements.
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One process well-established and long used in HUD's multifamily
housing programs is acceptance of partial payment of claims (PPCs).
Under the PPC process, FHA pays the mortgagee a portion of the unpaid
principal balance and recasts a portion of the mortgage under terms and
conditions determined by the FHA Commissioner (the Commissioner), as an
alternative to assigning the entire mortgage. Prior to processing the
PPC, the mortgagee must voluntarily agree to accept a partial payment
of the insurance claim in accordance with the terms and conditions
established by the Commissioner. The mortgagee must also waive any
prepayment and lock out provisions in the mortgage.
Congress granted FHA authority to allow PPCs for subsidized insured
multifamily properties in the Housing and Community Development
Amendments of 1978 (12 U.S.C. 1701z-11). The legislative history
reflects that a mortgagee's participation in a partial payment was
voluntary and based on its own determination that such an arrangement
would be in the mortgagee's own best interests.\2\ In the Housing and
Community Development Act of 1980 (12 U.S.C. 1701z-11), Congress
expanded FHA's authority to allow partial payments of claims beyond
subsidized projects to nonsubsidized multifamily rental housing project
insured under the National Housing Act. In the Multifamily Housing
Property Disposition Reform Act of 1994 (12 U.S.C. 1735f-19), a statute
primarily directed to a broad overhaul of multifamily program
operations, Congress clarified the voluntary nature of the PPC process
and the program coverage. The regulations implementing the statutory
authority to accept PPCs, which FHA adopted in 1985, and which are
codified in Sec. 207.258b, specifically excluded FHA's Section 232
program from the multifamily PPC process. (See 24 CFR 232.251(a).)
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\2\ Legislative History (H. Rep. No. 95-1792, 95th Congress, 2nd
session) cited the preamble to the final rule establishing the
regulations for PPCs. The cited preamble language is found at 50 FR
38784 (September 24, 1985).
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In 1997, Congress specifically authorized PPCs for the Section 232
program. (See 12 U.S.C. 1735f-19.) However, the regulatory provisions
governing the multifamily programs, which predated the 1997 statutory
amendments, were not revised to reflect the statutory authority to use
PPCs for healthcare facilities. Thus, the current regulations for the
multifamily programs establishing the procedures and criteria for
partial payments of claims for properties insured under other FHA
programs are not applicable to the Section 232 program.
II. This Proposed Rule
This proposed rule would provide, in regulation, the procedures and
criteria for FHA to determine when PPCs should be considered and paid
for healthcare facilities. To date, HUD has accepted PPCs in the
Section 232 program on a periodic basis, but HUD has concluded that the
criteria and procedures for granting PPCs in the Section 232 program
should be established and codified in regulation.
In developing regulations governing PPCs in the Section 232
program, the current regulations governing PPCs, codified at 24 CFR
207.258b, for the multifamily programs serve as a helpful starting
base. Additionally, this proposed rule is informed by FHA's experience
implementing the PPC process in its multifamily housing programs, and
FHA's experience in utilizing PPCs in the Section 232
[[Page 40312]]
program on a periodic and temporary basis.
This proposed rule adds a new Sec. 232.882, entitled ``Partial
Payment of Claims,'' to the Section 232 program regulations in 24 CFR
part 232. This new section provides that if the mortgagee elects to
assign a mortgage to the Commissioner, under certain circumstances the
Commissioner may request the mortgagee to accept a partial payment of
the claim. The proposed PPC regulations for the Section 232 program
differ from the current regulations establishing the PPC process for
the multifamily programs primarily because the focus of the Section 232
program is on healthcare facilities. While FHA must make a finding for
multifamily programs that the project is, or potentially could serve
as, a low- and moderate-income housing resource, the proposed PPC
regulations for the Section 232 program provide for FHA to review, in
its underwriting evaluation, the continued viability of the healthcare-
specific aspects of the project. FHA must find that the project meets
community healthcare needs, and will have sound management and project
operation. Under the statute, FHA must make a determination that a PPC
would be less costly to the government than other reasonable
alternatives and would keep the healthcare facility operational to
serve community needs.\3\ The proposed rule specifies that requirement
in Sec. 232.882.
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\3\ See section 210 of the Department of Veterans Affairs and
Housing and Urban Development Act of 1998. Public Law 105-65,
approved October 27, 1997.
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In addition, in an effort to ensure that the project will continue
to be viable, and therefore beneficial to accept and pay the PPC, the
proposed rule provides for certain determinations to be made.
Specifically, FHA must find, as provided in proposed Sec.
232.882(b)(4), that the current or proposed operator of the facility is
satisfactory, as demonstrated by past experience in operating similar
type healthcare facilities and by state regulatory performance
evaluations. An example of the type of information that FHA may require
is surveys/assessments by the state regulatory agency regarding the
subject facility's performance. If there are outstanding deficiencies
identified by the state regulatory authority or the Centers for
Medicare and Medicaid Services, then FHA anticipates that an applicant
would provide materials to FHA clearly establishing how those matters
would be fully resolved.
In addition, FHA must determine that the default under the insured
mortgage was beyond the control of the borrower and/or operator, or, in
the case of a transfer of physical assets, the proposed borrower or
operator, unless FHA determines that any borrower/operator deficiencies
giving rise to the default have clearly been addressed. (See proposed
Sec. 232.882(b)(5).) For a new operator, for example, FHA would review
information about the entity's experience and performance.
It should be noted that FHA's partial payment of claim is made
pursuant to the contract of mortgage insurance between FHA and the
mortgage lender, which are the only parties to the contract. Borrowers
and operators are neither parties to the contract of insurance, nor are
they third-party beneficiaries, and thus they do not have any rights or
expectations in regard to any decision made by FHA to accept or reject
a mortgagee's request for a partial payment of claim.
Further, FHA must specifically find that the project is serving or
potentially could serve as a needed nursing home, intermediate care
facility, board and care home, or assisted living facility. (See
proposed Sec. 232.882(b)(6).) Such a finding might be supported by a
review of, for example, a market-need study or a project comprehensive
needs assessment.
Other requirements specified in the proposed rule mirror the
requirements for PPCs for multifamily projects. The proposed rule
provides that FHA must find that:
The mortgagee is entitled, after a default, to assign the
mortgage in exchange for the payment of insurance benefits (see
proposed Sec. 232.882(b)(1));
The relief resulting from partial payment, when considered
with other resources available to the project, would be sufficient to
restore the financial viability of the project (see proposed Sec.
232.882(b)(2));
The project is or can (at reasonable cost) be made
structurally sound (see proposed Sec. 232.882(b)(3));
The default under the insured mortgage was beyond the
control of the owner (see proposed Sec. 232.882(b)(5));
The property covered by the mortgage is free and clear of
all liens other than the insured first mortgage and other liens
approved by the Commissioner (see proposed Sec. 232.882 (c)(1));
The mortgagee has voluntarily agreed to accept a PPC under
the mortgage insurance contract and to recast the remaining mortgage
amount under terms and conditions prescribed by the Commissioner (see
proposed Sec. 232.882(c)(2)); and
The owner has agreed to repay to the FHA Commissioner an
amount equal to the partial payment, with the obligation secured by a
second mortgage on the project containing terms and conditions
prescribed by the FHA Commissioner. The terms of the second mortgage
will be case-specific to ensure that the estimated project income will
be sufficient to cover estimated operating expenses and debt service on
the recast insured mortgage (see proposed Sec. 232.882(c)(3)).
By establishing a standard process and criteria for acceptance and
payment of PPCs in the Section 232 program, partial payment of claims
may occur more frequently than they do now in the Section 232 program,
not only resulting in savings to the FHA insurance fund, but helping to
restore a project to financial stability.
III. Costs and Benefits of Rule
In providing mortgage insurance for skilled nursing, intermediate
care, assisted living, and board and care facilities, as compared to
multifamily residential or other commercial properties, FHA's Section
232 program poses a significantly different risk to FHA because these
facilities are designed specifically for healthcare use and may not
retain the mortgaged value at resale due to a lack of alternative uses.
Thus, when HUD becomes the mortgagee following a claim, the recovery
rate--the sales price as a percentage of the unpaid balance--may be
lower for healthcare facilities than for other types of properties.
HUD is proposing in this rule to establish standards for the use of
PPC to minimize losses in the Section 232 program. Rather than paying
the full claim to the lender, a PPC involves FHA and the lender
restructuring the unpaid mortgage balance and accrued interest into two
mortgages: One held by the lender and the second held by HUD. The
lender's modified FHA-insured mortgage would range from 50 percent to
75 percent of the remaining unpaid principal balance. HUD's loan would
include the remainder of the unpaid balance and the accrued interest.
The lenders, FHA, and the facility owners each benefit from the use
of PPCs. The lender receives a portion of the unpaid balance, the full
unpaid interest, and a performing loan. This is a method of curing the
default with FHA rather than the borrower paying the lender. FHA avoids
a full claim payment and sale of the mortgage and is entitled to be
repaid the partial claim payment with interest. The facility owners
receive restructured debt and are able to continue operating the
[[Page 40313]]
facility, which is also beneficial to the community that the facility
serves.
The accompanying more detailed cost-benefit analysis is based on
the Section 232 current portfolio, and based on the characteristics of
the portfolio and the few cases where PPC was used in the program. FHA
expects the typical mortgage accepted for PPC would range from $5
million to $20 million (original amount) and would occur 3 to 7 years
after origination, following 10 to 30 months of delinquency. The
savings to HUD equals the difference between the full claim amount and
the partial claim paid, minus the discounted amount HUD receives from
the HUD-held post-PPC mortgage.
Use of PPC also allows an assisted living, skilled nursing, board
and care, or intermediate care facility to remain open to serve its
residents and community. The extent of this benefit varies with the
local market for long-term care. In smaller, less competitive markets,
the facility may be the only option for its residents. In this case, if
the facility were to close, residents and their families will have
higher search and relocation costs, since local options would be
limited, possibly requiring residents to have to relocate to another
city or state. However, in larger, more competitive markets, residents
may be able to find an alternative facility of similar cost and quality
in the same community. In any event, residents will face relocation
costs and possibly higher room rates or end up in a lower-quality
facility.
The benefits of allowing PPC in the Section 232 program total
$891,000 per facility, which stem from avoided costs of moving by the
facility's residents. Transfers totaling $2.874 million occur from FHA
and lenders that opt for PPC to FHA borrowers, as the avoided costs
allow FHA premiums to not increase. FHA expects approximately five PPCs
annually in the section 232 program. Aggregating these effects produces
annual benefits of $4.455 million and annual transfers of $14.369
million. For the full cost-benefit analysis, please see HUD's docket on
www.regulations.gov under the docket number of FR-5537-P-01.
IV. Findings and Certifications
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
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Estimated
Number of average time Estimated
Section reference Number of responses per for annual burden
respondents respondent requirement (in hours)
(in hours)
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24 CFR 232.882.................................. 10 1 100 1,000
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Totals...................................... 10 1 100 1,000
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In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments
from members of the public and affected agencies concerning this
collection of information to:
(1) Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
(2) Evaluate the accuracy of the agency'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-5537-P-01) and 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.
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 strengthening HUD's Section 232 program by
establishing a process and criteria by which the FHA may allow partial
payment of claims for Section 232 projects. Establishment of this
process also opens up another means by which healthcare project owners
can restore troubled projects to financial stability. Acceptance of
PPCs helps healthcare project owners and operators to lower project
debt, and continue to provide valued healthcare services to the
communities they serve. This established process for acceptance of PPCs
will help all healthcare project owners, large and small. Accordingly,
the undersigned certifies that this rule will not have a significant
economic
[[Page 40314]]
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 7th 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).
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial direct compliance costs on state and local
governments and is not required by statute, or the rule preempts state
law, unless the agency meets the consultation and funding requirements
of section 6 of the Executive Order. This 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.
Catalogue of Federal Domestic Assistance
The Catalogue of Federal Domestic Assistance Number for the
Mortgage Insurance Nursing Homes, Intermediate Care Facilities, Board
and Care Homes, and Assisted Living Facilities program is 14.129.
List of Subjects in 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, for the reasons cited in the preamble, HUD proposes to
amend part 232 of title 24 of the Code of Federal Regulations as
follows:
PART 232--MORTGAGE INSURANCE FOR NURSING HOMES, INTERMEDIATE CARE
FACILITIES, BOARD AND CARE HOMES, AND ASSISTED LIVING FACILITIES
1. The authority citation for 24 CFR part 232 is revised to read as
follows:
Authority: 12 U.S.C. 1715b, 1715w, 1735f-19; 42 U.S.C. 3535(d).
2. Add Sec. 232.882 to read as follows:
Sec. 232.882 Partial payment of claims.
(a) When a lender for a loan on a healthcare project becomes
eligible to file an insurance claim and to assign the mortgage to the
Commissioner pursuant to Sec. 232.865, the Commissioner may request
the lender, in lieu of assignment, to accept a partial payment of the
claim under the mortgage insurance contract and to recast the mortgage,
under such terms and conditions as the Commissioner may determine.
(b) The Commissioner may request the lender to participate in a
partial payment of claim in lieu of assignment only after a
determination that partial payment would be less costly to the Federal
Government than other reasonable alternatives for maintaining the
project and would keep the healthcare facility operational to serve
community needs. In addition to any findings that may be provided in
other guidance, the Commissioner shall base the determination on the
findings listed below:
(1) The lender is entitled, after a default as defined in Sec.
232.830, to assign the mortgage in exchange for the payment of
insurance benefits;
(2) The relief resulting from partial payment when considered with
other resources available to the project would be sufficient to restore
the financial viability of the project;
(3) The project is or can (at reasonable cost) be made physically
sound;
(4) The current or proposed operator of the facility is
satisfactory to the Commissioner, as demonstrated by past experience in
operating similar type healthcare facilities and by state regulatory
performance;
(5) The default under the insured mortgage was beyond the control
of the borrower and/or operator, or in the case of a transfer of
physical assets (TPA), the proposed borrower or operator, unless the
Commissioner determines that any borrower/operator deficiencies giving
rise to the default have clearly been addressed; and
(6) The project is serving as, or potentially could serve as, a
needed nursing home, intermediate care facility, or board and care
home, or assisted living facility.
(c) Partial payment of a claim under this section shall be made
only when:
(1) The property covered by the mortgage is free and clear of all
liens other than the insured first mortgage and such other liens as the
Commissioner may have approved;
(2) The lender has voluntarily agreed to accept a PPC under the
mortgage insurance contract and to recast the remaining mortgage amount
under terms and conditions prescribed by the Commissioner; and
(3) The borrower has agreed to repay to the Commissioner an amount
equal to the partial payment, with the obligation secured by a second
mortgage on the project containing terms and conditions prescribed by
the Commissioner. The terms of the second mortgage will be determined
on a case-by-case basis to ensure that the estimated project income
will be sufficient to cover estimated operating expenses and debt
service on the recast insured mortgage. The Commissioner may provide
for postponed amortization of the second mortgage.
(d) Payment of insurance benefits under this section shall be in
cash.
(e) A lender receiving a partial payment of claim, following the
Commissioner's endorsement of the mortgage for full insurance under 24
CFR part 252, will pay HUD a fee in an amount set forth through Federal
Register notice. HUD, in its discretion, may collect this fee or deduct
the fee from any payment it makes in the claim process.
Dated: June 28, 2012.
Carol J. Galante,
Acting Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2012-16559 Filed 7-6-12; 8:45 am]
BILLING CODE 4210-67-P