[Federal Register Volume 77, Number 236 (Friday, December 7, 2012)]
[Rules and Regulations]
[Pages 72920-72923]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-29545]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 232

[Docket No. FR-5537-F-02]
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: Final rule.

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SUMMARY: This rule amends the regulations governing FHA's Section 232 
Healthcare Mortgage Insurance program (Section 232 program) by 
establishing the criteria and process by which FHA will accept and pay 
a partial payment of a claim under the FHA mortgage insurance contract. 
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. 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

[[Page 72921]]

entire mortgage to HUD. Partial payment of claim also allows FHA-
insured healthcare projects to continue operating and providing 
services.

DATES: Effective Date: January 7, 2013.

FOR FURTHER INFORMATION CONTACT: Kelly Haines, 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:

A. 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). The 
regulations implementing the statutory authority to accept PPCs, which 
FHA adopted in 1985, and which are codified in 24 CFR 207.258b, 
specifically excluded FHA's Section 232 program from the multifamily 
PPC process. (See 24 CFR 232.251(a).)
    Congress specifically authorized PPCs for the Section 232 program 
in 1997. (See 12 U.S.C. 1735 f-19.) However, as 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, HUD proposed revisions 
specifically to address PPCs.

B. The Proposed Rule and Public Comments

    On July 9, 2012, HUD published a proposed rule at 77 FR 40301, in 
which it submitted for public comment a proposed revision to the 
Section 232 program regulations to provide, in regulation, the 
procedures and criteria for FHA to determine when PPCs should be 
considered and paid for healthcare facilities.
    The proposed regulations governing PPCs in the Section 232 program 
used the current multifamily program regulations governing PPCs, 
codified at 24 CFR 207.258b, as a baseline. Those PPC regulations were 
modified based on FHA's experience in implementing the PPC process in 
its multifamily housing programs, and in utilizing PPCs in the Section 
232 program on a periodic and temporary basis.
    The proposed rule added a new Sec.  232.882, entitled ``Partial 
Payment of Claims,'' to the Section 232 program regulations in 24 CFR 
part 232 to provide that if the mortgagee elects to assign a mortgage 
to the FHA Commissioner, under certain circumstances the Commissioner 
may request the mortgagee to accept a partial payment of the claim. 
That proposed PPC regulation for the Section 232 program differed from 
the regulations establishing the PPC process for the multifamily 
programs primarily because the focus of the Section 232 program is on 
healthcare facilities.
    As stated in the proposed rule preamble and emphasized here in this 
preamble to the final rule, 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.
    By establishing a standard process and criteria for acceptance and 
payment of PPCs in the Section 232 program, partial payment of claims 
can 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.
    The public comment period for the July 9, 2012, proposed rule 
closed on September 7, 2012, and HUD received one public comment 
through the www.regulations.gov Web site. The commenter, an association 
of healthcare finance bankers and healthcare consultants, expressed 
strong support for the proposed PPC change, as it would make the 
Section 232 program stronger by allowing appropriate use of the 
partial-payment-of-claim option and provide another tool to help 
struggling projects. The commenter offered no suggested changes, and 
urged HUD to implement the final rule as quickly as possible.

C. This Final Rule

    In this final rule, HUD adopts the proposed rule without 
substantive change, but makes an organizational change and makes 
certain citation revisions as a result of the organizational change. In 
this final rule, HUD is adding the PPC provisions to subpart B, 
entitled Contract Rights and Obligations. In the proposed rule, these 
changes were proposed to be added to subpart D, which is also titled 
Contract Rights and Obligations, but subpart D follows subpart C, 
Supplemental Loans to Finance Purchase and Install Fire Safety 
Equipment, and focuses on payments and claims related to loans to 
finance the purchase and installation of fire safety equipment. 
Relocating the PPC provisions to part 232 subpart B, which addresses 
contract rights and obligations generally under the Section 232 
program, was determined to be a more appropriate fit. Further, HUD has 
made several minor revisions in the final rule stage to conform the 
references in this rule to the relevant sections describing the claims 
process to reflect the change from subpart D.

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

[[Page 72922]]

consider regulatory approaches that reduce burdens and maintain 
flexibility and freedom of choice for the public. As this rule will 
include guidance for PPCs in the Code of Federal Regulations, HUD 
submits that the changes by this rule to the Section 232 regulations 
are consistent with the EO's directions. The existing Section 232 
regulations provide insufficient guidance to the public on PPCs for the 
Section 232 program. These changes will 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, as an alternative to the lender assigning 
the entire mortgage to HUD. It therefore strengthens the Section 232 
program, and helps to ensure that healthcare facilities remain 
financially viable.

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. As noted under the 
discussion of EO 13563, 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. Additionally, by clarifying and 
codifying existing requirements, the rule makes it easier for borrowers 
and operators to comply with their legal obligations. Accordingly, the 
undersigned certifies that this rule will not have a significant 
economic impact on a substantial number of small entities.

Information Collection Requirements

    The information collection requirements contained in this rule were 
reviewed by the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520), and assigned OMB 
Control Numbers 2502-0418.
    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 docket file is available for public inspection.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
for this rule was made at the proposed rule stage 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 of No Significant Impact remains applicable to this final 
rule and 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 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 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 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 amends 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

0
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).

0
2. Add Sec.  232.256 to subpart B to read as follows:


Sec.  232.256  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.  207.258, the Commissioner may request 
the lender, in lieu of assignment, to accept a partial payment of the 
claim under the mortgage insurance contract and 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 that 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.  
207.255, 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

[[Page 72923]]

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 types of 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, 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: December 3, 2012.
Carol J. Galante,
Acting Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2012-29545 Filed 12-6-12; 8:45 am]
BILLING CODE 4210-67-P