[Federal Register Volume 79, Number 145 (Tuesday, July 29, 2014)]
[Rules and Regulations]
[Pages 43929-43933]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-17742]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 207
[Docket No. FR-5583-F-02]
RIN 2502-AJ16
Federal Housing Administration (FHA) Multifamily Mortgage
Insurance; Capturing Excess Bond Proceeds
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Final rule.
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SUMMARY: This final rule amends HUD's regulations covering the contract
rights and obligations of mortgagees participating in FHA multifamily
mortgage insurance programs, to address reimbursement to FHA of excess
bond proceeds. When a mortgagee finances mortgages through the issuance
and sale of bonds or through bond anticipation notes, the mortgagee
uses the funds from the payment of a mortgage insurance claim under HUD
regulations addressing FHA multifamily insurance claim payment to pay
off the remaining bond debts. At times, the amount paid by the FHA
multifamily insurance claim is greater than the remaining bond debts.
This final rule requires mortgagees that finance a project using a
project-specific trust indenture agreement to include language in the
trust indenture to require that excess bond funds that remain after
FHA's multifamily insurance claim payment is used to satisfy the bonds
are returned to FHA. HUD requires similar payments of excess bond funds
on obligations of public housing agencies and, thus, the final rule
provides consistency in the administration of HUD's bond-financed
mortgages.
DATES: Effective Date: August 28, 2014.
FOR FURTHER INFORMATION CONTACT: Claire T. Brolin, Management Analyst
(Directives), Office of the Deputy Assistant Secretary for Multifamily
Housing Programs, Program Administration Office, Office of Housing,
Department of Housing and Urban Development, 451 7th Street SW., Room
6106, Washington, DC 20410; telephone number 202-402-6634 (this is not
a toll-free number). Persons with hearing or speech impairments may
access this number through TTY by calling the Federal Relay Service,
toll free, at 800-877-8339.
[[Page 43930]]
SUPPLEMENTARY INFORMATION:
I. Background
On July 10, 2013 (78 FR 41339), HUD published for public comment a
proposed rule that would amend HUD's regulations in 24 CFR part 207
that cover the contract rights and obligations of mortgagees
participating in FHA multifamily mortgage insurance programs, to
address reimbursement to FHA of excess bond proceeds.\1\ FHA provides
mortgage insurance on loans made by FHA-approved lenders for single-
family and multifamily homes. The FHA multifamily insurance program is
authorized under applicable sections of Title II of the National
Housing Act. HUD's regulations in 24 CFR part 207 provide that upon an
assignment of the mortgage or a conveyance of the property to FHA, FHA
will pay insurance benefits to the mortgagee in accordance with a
regulatory formula \2\ that is meant to provide only the funds needed
to pay the FHA insurance claim.
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\1\ Regulations in 24 CFR part 207, subpart B, particularly
pertaining to payment of FHA insurance claims, are applicable to
other FHA insurance programs and are incorporated by reference where
applicable.
\2\ See 24 CFR 207.259.
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However, when the loan is bond financed, the amount FHA pays to the
lender may be greater than the funds needed to pay the FHA insurance
claim and discharge all other obligations of the trust indenture. When
FHA pays an insurance claim on a bond-financed mortgage, the lender
remits the payment to the bond trustee who pays off the bond debts,
debt services on the bond, and fees and expenses owed to parties (such
as the trustee or the bond issuer). Most of the factors in determining
the amounts required to pay the FHA insurance claim and satisfy
servicer fees required to be paid by the trust indenture can be
calculated with precision, but the amount of funds in the trust is not
known prior to accounting for the final interest earnings on the
invested trust fund balances. Funds in the trust accounts earn interest
and, given the passage of time and uncertainty of short-term interest
rates, it is difficult to project what the trust fund balance will be
at the time the FHA multifamily insurance claim is settled and all the
trust indenture obligations are finally paid. As a result, the trustee
is sometimes left with additional funds, also known as ``excess bond
funds.'' Excess bond funds are distributed by the bond trustee to the
mortgagor, the mortgagee, FHA, or other third parties, according to the
trust indenture agreement. As a result, the mortgagor or the mortgagee
may receive excess bond funds after redeeming the bonds with the FHA
multifamily insurance claim proceeds.
HUD's July 10, 2013, rule proposed to establish, in the 24 CFR part
207 regulations, a new Sec. 207.261 that would require mortgagees to
remit to FHA the excess bond funds that remain after the FHA
multifamily insurance claim payment is used to satisfy the bonds, which
represents the funds that FHA's regulatory formula is unable to account
for at the time the FHA multifamily insurance claim was settled, due to
the nature of bond financing. Interested readers should refer to the
preamble of the July 10, 2013, proposed rule for additional information
on the proposed regulatory change.
II. This Final Rule
This final rule follows publication of the July 10, 2013, proposed
rule and takes into consideration the public comments received on the
proposed rule. The public comment period on the proposed rule closed on
September 9, 2013, and HUD received public comments from two
commenters. Section IV of this preamble discusses the comments received
on the proposed rule.
At the final rule stage, HUD has decided to amend the scope of the
proposed rule, to provide clarifications in response to public
comments, to correct an incorrect citation, and to make some editorial
changes. Specifically, HUD is limiting the application of the rule to
mortgagees that finance a project through bonds and use a project-
specific trust indenture agreement. This action is consistent with how
HUD treats bonds governed by HUD's regulations in 24 CFR part 811,
which apply only to bonds financing single projects. Although this
final rule does not relieve mortgagees that finance a project through
multiple-project parity bonds from being responsible for returning
excess bond funds that are identified, HUD recognizes the burden that
would be borne if the specific trust indenture language was applied to
multiple-project parity bond structures. HUD is also clarifying that
the contract rights and obligations being amended under 24 CFR part 207
apply to all FHA multifamily mortgage insurance programs, including
loans on healthcare facilities insured under Sections 232, 241, and 242
of the National Housing Act.
In addition to limiting the rule's scope, the proposed rule
included a parenthetical referencing ``the date of issuance of the
refunding bonds'' as the cut-off date for exempting the originally-
deposited funds. HUD takes the opportunity afforded by this rule to
replace the phrase ``refunding bonds'' with simply ``bonds'' so as to
not create confusion, and to clarify that the date for exempting the
originally-deposited funds is limited to the bonds used to secure the
FHA-insured multifamily mortgage that the mortgagee has submitted an
FHA multifamily insurance claim for. HUD's proposed rule also
incorrectly referenced Sec. 207.258 as the provision in which FHA pays
a FHA insurance claim, HUD at the final rule stage replaces the
incorrect citation with the correct reference to Sec. 207.259.
Lastly, HUD clarifies the exact language to be included in the
trust agreement and makes some editorial changes at this final rule
stage. HUD incorporates the definition of ``rebate fund'' into the new
Sec. 207.261 as paragraph (b) to ease implementation for FHA
multifamily insurance programs that cross-reference to the provisions
in 24 CFR part 207, subpart B, but exclude the subpart B definitions in
207.251.
Consistent with HUD's proposed rule, new Sec. 207.261(a) requires
mortgagees that finance housing insured under Title II of the National
Housing Act through the issuance and sale of bonds or bond anticipation
notes, and use a project-specific trust indenture agreement that
clearly outlines the project and identifies by project the trust funds
established by and administered in accordance with the terms of the
trust indenture, to meet the requirements set out in paragraphs (1) and
(2) of this section.
Paragraph (1) requires that the mortgagee include in the bond trust
indenture language that, upon a conveyance or assignment of the
mortgage to the FHA Commissioner, the bond trustee must remit to the
mortgagee all remaining excess bond funds. Excess bond funds mean (1)
money remaining in all funds and accounts other than a rebate fund,\3\
and (2) any other funds remaining under the trust indenture after
payment, or provision for payment, of debt service on the bonds and the
fees and expenses of the credit enhancer, issuer, trustee, and other
such parties unrelated to the mortgagor (other than funds originally
deposited by the mortgagor or related
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parties on or before the date of issuance of the bonds).
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\3\ A rebate fund, also referred to as an arbitrage rebate fund
is a fund typically established under the bond contract for tax-
exempt bonds in which arbitrage earnings from investments in various
funds and accounts holding bond proceeds are accumulated in order to
make arbitrage rebate payments to the Federal Government. See http://www.msrb.org/msrb1/glossary/view_def.asp?param=ARBITRAGEREBATEFUND. See also http://www.irs.gov/pub/irs-tege/part2e02.pdf.
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Paragraph (2) requires that the mortgagee, upon the FHA
Commissioner's payment of an FHA mortgage insurance claim under Sec.
207.259, shall legally enforce the trust indenture to collect all of
the excess bond funds; and the mortgagee must remit to FHA all excess
bond funds that result from FHA's payment of an FHA insurance claim
after a conveyance or assignment of the mortgage to FHA, no later than
6 months following the date of the final settlement on the FHA mortgage
insurance claim.
New paragraph (b) includes the definition of ``rebate fund''
consistent with the proposed rule, and defines ``rebate fund'' as a
separate fund established under a contract or agreement for tax-exempt
bonds in which amounts (excess interest earnings from the tax-exempt
bonds) must be deposited to make rebate payments to the federal
government under the Internal Revenue Code.
III. HUD's Responses to Key Issues Raised by Public Commenters
The following section presents a summary of the public comments in
response to the July 10, 2013, proposed rule, and HUD's responses.
Comment: Make the rule effective only prospectively: Commenters
requested that the rule apply only to future financings and questioned
HUD's legal authority to require the changes to existing trust
indentures.
Response: The rule is effective prospectively and does not create
any obligations to amend existing trust indentures.
Comment: The rule should not apply to the Risk-Sharing Programs
(Section 542): Commenters requested that HUD add commentary in the
final rule to clarify the rule does not apply to the Risk-Sharing
Program, authorized by Section 542(c) of the Housing and Community
Development Act of 1992.
Response: This rule applies only to those multifamily loans insured
under Title II of the National Housing Act that authorizes payment of
the FHA insurance claim pursuant to Section 207, and does not apply to
the Risk-Sharing Program.
Comment: Eliminate the ``Refunding Bond'' reference: A commenter
queried whether ``refunding'' should be removed from the parenthetical
phrase at the end of the new Section 207.261(a).
Response: HUD concurs with this suggestion and, as discussed above
in Section II, HUD has removed the reference to ``refunding bonds''
from section 207.261.
Comment: HUD should limit the rule to prevent excess bond funds
from going to mortgagors: A commenter stated that if it is HUD's intent
to prohibit the mortgagor from receiving excess bond proceeds then HUD
should limit the regulation to that purpose.
Response: HUD does not believe that the rule should specifically
target mortgagors. The FHA multifamily mortgage insurance program was
created to increase the availability of affordable housing or provision
of healthcare facilities. The payment of an FHA multifamily insurance
benefit upon an assignment of the mortgage or a conveyance of the
property to FHA is meant to provide only the funds needed to settle the
FHA multifamily insurance claim. In all non-bond financed transactions,
FHA's formula results in payment of the exact funds needed to settle
the FHA mortgage insurance claim. This rule considers the specific
nature of a bond-financed transaction and requires the mortgagee to
adopt procedures that equalizes the result with non-bond financed
transactions.
Comment: The analogy to 24 CFR part 811 bonds is inappropriate
because the single project bond financing structure is not always used
in FHA-insured multifamily projects: A commenter wrote that the
reference to single project bond financings for Section 8 assisted
projects under 24 CFR part 811 fails to recognize the scope of
financing done by state and local housing finance agencies (HFAs) in
FHA-insured multifamily bond-financed projects. Two commenters stated
that the rule inaccurately assumes that bonds are issued under a bond
resolution (or trust indenture) to finance only one FHA-insured
multifamily mortgage loan and to fund a reserve fund, similar to
section 811 bond-financed projects, but that state HFAs normally
finance multifamily developments on a pooled basis. The commenters
stated that HFAs finance a group of mortgage loans under one general
bond resolution, which may or may not have a reserve fund, and if there
is a reserve fund, it typically would secure all of the series of bonds
issued under the general bond resolution. The commenters further stated
that the series of bonds financing an FHA-insured multifamily mortgage
loan, as well as other mortgage loans, are not typically structured on
a pass-through basis, but rather may have annual, semi-annual, or
sinking fund payment terms. The commenters continued, stating that upon
the payment in full of any mortgage loan, the resolution continues in
effect unless all of the bonds issued under the general bond resolution
have been paid in full. The commenters concluded stating that given the
variety and complexity of these structures, when FHA makes an FHA
insurance claim payment, the principal amount of outstanding bonds may
not be equal to the FHA insurance claim payment.
Response: HUD agrees with the commenters that this rule should be
based on the use of a project-specific trust indenture as commonly used
in Section 8 housing under Part 811 regulations. Therefore, the final
rule adds language to clarify the types of transactions to which this
rule applies.
Comment: The requirement that an HFA pay multi-project remaining
funds to FHA that are distinct from those contributed by HUD is
inequitable. A commenter objected to the requirement that the HFA pay
to FHA the amount that an FHA multifamily insurance claim payment
exceeded the principal balance on multi-project unredeemed bonds, to
include excess funds that result from the application of the HFA's own
funds to retire bonds. The commenter urged that all rights to this
excess amount should be retained by the HFA.
Response: HUD acknowledges the concerns made by the commenters and,
as discussed in Section II of this preamble, the final rule should not
impact HFA's funds contributed on parity bond issue multiple-project
funds.
Comment: This rule would require state HFAs to liquidate the bond
resolution for a single claim and accomplish the impractical task of
tracking funds on each project, resulting in higher costs and risks: A
commenter stated that to remit all monies held in the ``funds and
accounts'' to FHA in the event of a single FHA multifamily insurance
claim, a state HFA would need to liquidate the bond resolution, which
is contrary to the provisions of the resolution that require
continuation until all bonds issued under the resolution are paid. The
commenter stated that a single FHA multifamily insurance claim usually
accounts for a small portion of these monies, but the regulation as
written would require the liquidation of the entire bond resolution for
one FHA multifamily insurance claim, and that even if the HFA
liquidated the bond resolution, it may not be possible for the HFA to
determine the amount, if any, that would be payable to FHA under the
rule.
Commenters stated that the rule would create the practical problem
of how to track the ``excess bond funds''
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over the life of the mortgage loan. The commenters stated that the
pooled arrangement and transactions subsequent to the financing of the
FHA-insured multifamily mortgage loan make it difficult if not
impossible to track the funds specific to a single mortgage loan. The
commenters stated that a pro rata allocation of the reserve fund would
be unworkable because reserve fund deposits are partly based on the
creditworthiness of each loan, and that due to the complexity of
tracking, an HFA would probably choose not to utilize the parity
general trust indenture, but would instead use pass through financing
that has higher rates and costs, and is a potentially riskier bond.
Response: The change made at the final rule, as discussed in
section II, will not require the tracking of ``excess bond funds'' in
multiple-project parity bond issue structures.
Comment: The increase costs provide little benefits to FHA: A
commenter wrote that the new structure required by this rule would
place a higher burden on HFAs and FHA, but would come with relatively
little anticipated financial benefit. The commenter stated that bond
issuers are already limited to amounts they may hold and recover and
excess funds are marginal given the complex rules of tax-exempt
financing.
Response: HUD understands that when considering each transaction
individually, the financial gain to bond issuers appears to be minimal.
However, as discussed in Section IV, when viewing the transactions in
the aggregate, the savings for FHA proves to be greater.
Comment: The rule could result in a loss of affordable housing
units and increase FHA multifamily insurance claims if the rule
includes payments of the federally-permitted 1.5 percent annual spread:
A commenter wrote that if the rule required HFAs to remit the 1.5
percent annual spread authorized by the Internal Revenue Code to FHA,
then FHA could see higher multifamily insurance claims. The commenter
stated that, currently, HFAs maintain an accumulated annual spread as
additional security for the bonds and use the spread to assist troubled
projects to avoid loan defaults and the loss of affordable housing
units. The commenter stated that if HFAs withdraw their annual spread,
it could increase the incidence (and possibly the size) of FHA
multifamily insurance claims, and that therefore applying the rule to
the 1.5 percent spread would significantly disincentivize an HFA from
maintaining the spread.
Response: The 1.5 percent annual spread authorized by the Internal
Revenue Code to help state HFAs meet the costs of operating affordable
housing programs is an ongoing operating fee, not a bond reserve fund
residual, which is the subject of this rule.
IV. Cost and Benefits of the Final Rule
This final rule directs mortgagees participating in FHA multifamily
insurance programs and using tax-exempt bonds under section 103 of the
Internal Revenue Code (IRC) \4\ to return to FHA the proceeds remaining
after bond debts have been paid off using amounts received in
connection with an FHA mortgage insurance claim payment. The existence
and possible value of any excess bond funds to individual private
entities is limited and cannot be precisely stated, as such measures
are dependent on the following: The occurrence and timing of a default
(which is by definition an unforeseen result of any non-fraudulent
lending in the program); the current interest rate environment; \5\ the
trust indenture; and, then, on the independent actions that HUD and the
trustee take. Approximately 3 percent of projects for which FHA
multifamily insurance claims were paid were financed by issuing section
103 tax-exempt bonds. In 2012, there were $189 million in claims and 3
percent of this number, $5.67 million, provides an estimate of the
total claims for tax-exempt bond-financed projects. HUD estimates that
about 1.16 percent of outstanding balances are subject to recapture;
therefore, in 2012 there would have been an estimated $66,000 of funds
in excess of that required to discharge the lien of the trust
indenture. The 2012 data pertaining to FHA multifamily insurance claims
for tax-exempt bond-financed projects suggests the aggregate amount of
funds is well below the amount that would make this rule economically
significant.
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\4\ Under section 103, payments of interest on State or local
bonds are excludable from gross income. (See 26 U.S.C. 103.)
\5\ Reserve funds may grow more slowly due to low interest rates
and the low rates on taxable financing have made tax-exempt
financing less advantageous to developers.
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The transfer of excess bond funds to FHA by this final rule makes
explicit that FHA's payment of a multifamily mortgage insurance claim
for bond debts must not result in an amount above actual expenses being
retained by the mortgagee, the mortgagor, or any third party. Given the
inherently unexpected nature and uncertain dollar amount of any excess
bond funds, the final rule is not expected to have a significant impact
on future mortgagees' interest or behavior in the program. The final
rule is also unlikely to affect how future mortgagors or others
experience the program. It should be noted that, while the impact of
the final rule on any individual entity is likely to be
inconsequential, there is value to FHA from the change. The occurrence
of defaults and resulting excess bond funds are statistically likely
events, and the aggregate amount of program funds currently expended
across all FHA multifamily insurance claims over time is sufficient to
justify the final rule.
V. Findings and Certifications
Paperwork Reduction Act
The information collection requirements contained in this rule have
been approved 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 number 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.
Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 605(b)) generally requires
an agency to conduct 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 would not
impose any economic burdens on FHA-approved multifamily mortgagees. The
regulatory amendments would not modify the terms of FHA multifamily
mortgage insurance through which mortgagees are made financially whole
in the case of a mortgage default and filing of a FHA multifamily
mortgage insurance claim. The rule ends the possibility that a
mortgagor or mortgagee may profit from a multifamily mortgage default,
which is inconsistent with HUD's public housing bond financing
regulations, the purpose of the FHA insurance programs, and the proper
administration of the FHA mortgage insurance funds. Accordingly, the
undersigned certifies that this rule will not have a significant
economic impact on a substantial number of small entities.
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism
[[Page 43933]]
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 would not have federalism implications and would not
impose substantial direct compliance costs on state and local
governments or preempt state law within the meaning of the Executive
Order.
Environmental Review
This final rule does not direct, provide for assistance or loan and
mortgage insurance for, or otherwise govern, or regulate, real property
acquisition, disposition, leasing, rehabilitation, alteration,
demolition, or new construction, or establish, revise, or provide for
standards for construction or construction materials, manufactured
housing, or occupancy. Accordingly, under 24 CFR 50.19(c)(1), this
final rule is categorically excluded from environmental review under
the National Environmental Policy Act of 1969 (42 U.S.C. 4321).
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (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 the private sector. This final rule does not
impose any Federal mandates on any state, local, or tribal government,
or the private sector within the meaning of UMRA.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance number for FHA mortgage
insurance for the purchase or refinancing of existing multifamily
housing projects is 14.155.
List of Subjects in 24 CFR Part 207
Manufactured homes, Mortgage insurance, Reporting and recordkeeping
requirements, Solar energy.
Accordingly, for the reasons stated in the preamble, HUD amends 24
CFR part 207 as follows:
PART 207--MULTIFAMILY HOUSING MORTGAGE INSURANCE
0
1. The authority citation for part 207 continues to read as follows:
Authority: 12 U.S.C. 1701z-11(e), 1709(c)(1), 1713, and 1715(b);
42 U.S.C. 3535(d).
0
2. Add Sec. 207.261 to read as follows:
Sec. 207.261 Capturing excess bond proceeds.
(a) A mortgagee that finances multifamily housing or healthcare
facilities insured under Title II of the National Housing Act through
the issuance and sale of bonds or bond anticipation notes and uses a
project-specific trust indenture agreement, that clearly outlines the
project and identifies by project the trust funds established by and
administered in accordance with the terms of the trust indenture,
shall:
(1) Include the following clause in the trust indenture: In the
event of an assignment or conveyance of the mortgage to the
Commissioner, subsequent to the issuance of the bonds, all money
remaining in all funds and accounts other than the rebate fund, and any
other funds remaining under the trust indenture after payment or
provision for payment of debt service on the bonds and the fees and
expenses of the credit enhancer, issuer, trustee, and other such
parties unrelated to the mortgagor (other than funds originally
deposited by the mortgagor or related parties on or before the date of
issuance of the bonds) shall be returned to the mortgagee.
(2) Upon the Commissioner's payment of an FHA mortgage insurance
claim under Sec. 207.259, the mortgagee shall take all legally-
entitled actions to enforce the clause required by paragraph (a)(1) of
this section and pay the Commissioner any trust funds remaining after
discharge by the trustee of all obligations of the trust indenture, no
later than 6 months after the date of the Commissioner's final
settlement of the FHA mortgage insurance claim.
(b) For purposes of paragraph (a) of this section, the term
``rebate fund'' means a separate fund established under a contract or
agreement for tax-exempt bonds in which amounts (excess interest
earnings from the tax-exempt bonds) must be deposited to make rebate
payments to the federal government under the Internal Revenue Code.
Dated: July 17, 2014.
Carol J. Galante,
Assistant Secretary for Housing, Federal Housing Commissioner.
[FR Doc. 2014-17742 Filed 7-28-14; 8:45 am]
BILLING CODE 4210-67-P