Federal Register, Volume 64 Issue 227 (Friday, November 26, 1999)

[Federal Register Volume 64, Number 227 (Friday, November 26, 1999)]
[Proposed Rules]
[Pages 66530-66540]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-30814]

[[Page 66529]]

_______________________________________________________________________

Part II

Department of Housing and Urban Development

_______________________________________________________________________

24 CFR Parts 5 and 200

Uniform Physical Condition Standards and Physical Inspection
Requirements for Certain HUD Housing; Administrative Process for
Assessment of Insured and Assisted Properties; Proposed Rules

Federal Register / Vol. 64, No. 227 / Friday, November 26, 1999 /
Proposed Rules

[[Page 66530]]

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 5 and 200

[Docket No. FR-4452-P-01]
RIN 2501-AC45

Uniform Physical Condition Standards and Physical Inspection
Requirements for Certain HUD Housing; Administrative Process for
Assessment of Insured and Assisted Properties

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.

ACTION: Proposed rule.

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SUMMARY: This proposed rule establishes for multifamily housing (non-
public housing as more fully described in the Supplementary Information
section) certain administrative processes by which HUD will notify
owners of HUD's assessment of the physical condition of their
multifamily housing; the owners, under certain circumstances, will be
provided an opportunity to seek technical review of HUD's physical
condition assessment of the multifamily housing; and HUD may take
action in certain cases where the housing is found not to be in
compliance with the physical condition standards.

DATES: Comments Due Date: January 25, 2000.

ADDRESSES: Interested persons are invited to submit comments regarding
this proposed rule to the Regulations Division, Office of General
Counsel, Room 10276, Department of Housing and Urban Development, 451
Seventh Street, SW, Washington, DC 20410. Communications should refer
to the above docket number and title. Facsimile (FAX) comments are not
acceptable. A copy of each communication submitted will be available
for public inspection and copying between 7:30 a.m. and 5:30 p.m.
weekdays at the above address.

FOR FURTHER INFORMATION CONTACT: For further information about
multifamily issues covered by this rule, contact: Kenneth Hannon,
Office of Housing, Department of Housing and Urban Development, 451
Seventh Street, SW, Room 6274, Washington, DC 20410; telephone (202)
708-0547, ext. 2599 (this is not a toll-free number).
For further information about the scoring methodology or the
technical review process, contact: Wanda Funk, Real Estate Assessment
Center, Department of Housing and Urban Development, 1280 Maryland
Avenue, SW, Suite 800, Washington, DC, 20024; telephone Customer
Service Center at 1-888-245-4860 (this is a toll-free number).
For both offices, persons with hearing or speech impairments may
access that number via TTY by calling the Federal Information Relay
Service at 1-800 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background--Uniform Physical Conditions Standards and Uniform
Physical Inspection Protocols

On September 1, 1998 (63 FR 46566), HUD published a final rule that
established uniform physical condition standards for public housing,
and housing that is insured and/or assisted under certain HUD programs
(collectively, HUD properties). The September 1, 1998, final rule also
established uniform physical inspection protocols, based on
computerized software developed by HUD, that allows HUD to determine
compliance with these standards. The uniform physical condition
standards are intended to ensure that HUD program participants carry
out their legal obligations to maintain HUD properties in a condition
that is decent, safe, sanitary and in good repair. The uniform
inspection protocols are intended to assure that, to the greatest
extent possible, there is uniformity and objectivity in the evaluation
of the physical condition of HUD properties.
Before issuance of the September 1, 1998, final rule, HUD
properties were required to meet physical condition standards and to
undergo an annual physical inspection. The standards and inspection
protocols which were then applicable to these properties, however,
varied from HUD program to HUD program. The September 1, 1998, final
rule was the first step directed toward achieving uniformity and
consistency in the physical condition standards applicable to all HUD
properties and in the inspection procedures to be used. For multifamily
housing (as defined in Section IV of this preamble), the September 1,
1998, final rule represented the first step toward uniform and
standardized assessment of the physical condition of multifamily
housing properties. This proposed rule proceeds to the next stage which
is to establish for multifamily housing properties certain
administrative processes by which (1) HUD will notify owners of HUD's
assessment of the physical condition of their multifamily housing
properties; (2) the owners, under certain circumstances, will be
provided an opportunity to seek technical or other review of HUD's
physical condition assessment of the multifamily housing properties;
and (3) HUD may take action in certain cases where a property is found
not to be in compliance with the physical condition standards.

II. Assessing and Scoring the Physical Condition of HUD
Properties--HUD's Real Estate Assessment Center

The establishment of a system by which all HUD properties are
assessed for compliance with physical conditions standards using
uniform criteria is one of the key reforms of the HUD 2020 Management
Reform Plan. The HUD 2020 Management Reform Plan, announced by
Secretary Andrew Cuomo on June 26, 1997, is directed to (1) empowering
people and communities to improve themselves, and (2) restoring HUD's
reputation and credibility by improving the efficiency and
effectiveness of HUD's programs, operations and delivery of services.
Under the HUD 2020 Management Reform Plan, HUD's newly established Real
Estate Assessment Center (REAC) is charged, among other things, with
the responsibility for assessing and scoring the physical condition of
HUD properties. Until the establishment of the REAC, HUD's Office of
Housing and its Office of Public and Indian Housing independently
operated separate real estate assessment operations, yet the
administration of both organization's multifamily portfolios is a
common function of asset management. In the HUD 2020 Management Reform
Plan, HUD advised that the assessment of all properties of the Office
of Housing and the Office of Public and Indian Housing would be
consolidated, and the evaluation standards and procedures would be made
uniform to the greatest extent possible. The REAC is responsible for
assessing and scoring the performance of HUD properties.
With the establishment of the REAC, HUD now has in place an
effective and comprehensive assessment system for physically inspecting
and financially assessing all HUD properties using uniform inspection
protocols. Application of uniform physical condition standards to all
HUD properties and evaluation through uniform inspection protocols are
important to a fair assessment process. One of HUD's objectives under
HUD 2020 Management Reform is not only to identify where performance by
program participants fails to meet acceptable standards (and to assist
these participants in improving their performance or take enforcement
action where appropriate), but also to identify those program
participants that meet or

[[Page 66531]]

exceed acceptable standards and to provide incentives to these
participants wherever possible. As part of the administrative processes
to be established by this proposed rule, the REAC has begun a baseline
physical inspection review of certain multifamily housing properties
(baseline review). This review was announced by notice published in the
Federal Register on February 9, 1999 (64 FR 6370) (February 9, 1999
Baseline Notice). This review was requested by the Congressional
conferees in the FY 1999 HUD Appropriations Act.

III. Enforcing Compliance with HUD Program Requirements--HUD's
Enforcement Center

Under the HUD 2020 Management Reform Plan, HUD has combined certain
non-civil rights enforcement actions into one authority--the
Departmental Enforcement Center (DEC). Before establishment of the DEC,
each of HUD's program offices (the Office of Community Planning and
Development, the Office of Housing, and the Office of Public and Indian
Housing) operated independent enforcement functions, with different
standards and procedures. The DEC is now the central Departmental
office for taking action against owners of HUD assisted or insured
properties determined to be in noncompliance with the rules and
regulations of the Department or their contractual obligations with the
Department. As will be discussed in more detail below, the DEC will
have an important role in the administrative process, proposed in this
rule, for covered multifamily housing.

IV. This Proposed Rule--Administrative Process for Scoring and
Ranking Multifamily Housing Properties

(A) Covered Multifamily Housing Properties

Multifamily housing properties covered by this rule are the same as
those listed in 24 CFR 5.701(a) and (b), published on September 1,
1998.
These properties are:
(a) Housing assisted by HUD under the following programs:
(1) All Section 8 project-based assistance. ``Project-based
assistance'' means Section 8 assistance that is attached to the
structure (see 24 CFR 982.1(b)(1) regarding the distinction between
``project-based'' and ``tenant-based'' assistance);
(2) Section 202 Program of Supportive Housing for the Elderly
(Capital Advances);
(3) Section 811 Program of Supportive Housing for Persons with
Disabilities (Capital Advances); and
(4) Section 202 loan program for projects for the elderly and
handicapped (including 202/8 projects and 202/162 projects).
(b) Housing with mortgages insured or held by HUD, or housing that
is receiving insurance from HUD, under the following authorities:
(1) Section 207 of the National Housing Act (NHA) (12 U.S.C. 1701
et seq.) (Rental Housing Insurance);
(2) Section 213 of the NHA (Cooperative Housing Insurance);
(3) Section 220 of the NHA (Rehabilitation and Neighborhood
Conservation Housing Insurance);
(4) Section 221(d)(3) of the NHA (Market Interest Rate (MIR)
Program);
(5) Section 221(d)(3) and (5) of the NHA (Below Market Interest
Rate (BMIR) Program);
(6) Section 221(d)(4) of the NHA (Housing for Moderate Income and
Displaced Families);
(7) Section 231 of the NHA (Housing for Elderly Persons);
(8) Section 232 of the NHA (Mortgage Insurance for Nursing Homes,
Intermediate Care Facilities, Assisted Living Facilities, Board and
Care Homes);
(9) Section 234(d) of the NHA (Rental) (Mortgage Insurance for
Condominiums);
(10) Section 236 of the NHA (Rental and Cooperative Housing for
Lower Income Families);
(11) Section 241 of the NHA (Supplemental Loans for Multifamily
Projects); and
(12) Section 542(c) of the Housing and Community Development Act of
1992 (12 U.S.C. 1707 note) (Housing Finance Agency Risk Sharing
Program).
As noted above, the covered properties are the same as those listed
in 24 CFR 5.701(a) and (b) of the September 1, 1998, final rule. In the
September 1, 1998, final rule, the reference to `section 221(d)(3) and
(5) of the NHA (Housing for Moderate Income and Displaced Persons)' is
intended to cover both the section 221(d)(3) BMIR (Below-Market
Interest Rate) program and the section 221(d)(3) MIR (Market Interest
Rate) program. HUD now recognizes, however, that there is a possibility
for confusion with this reference because one could misconstrue the
reference as only applicable to section 221(d)(3) BMIR properties. A
section 221(d)(3) BMIR property is insured under section 221(d)(3) of
the NHA as is the section 221(d)(3) MIR Program, but the below-market
interest rate for the section 221(d)(3) BMIR Program is provided
pursuant to section 221(d)(5). Therefore, in this proposed rule, the
coverage is more precisely delineated by reflecting the separate
references to both programs.

(B) Process for Assessing, Scoring and Ranking Multifamily Housing
Properties

For owners of covered multifamily housing properties, this proposed
rule would add a new subpart P to 24 CFR part 200, to establish an
assessment process for multifamily housing properties which would
include the following components.
(1) Scoring and Ranking the Physical Condition of Multifamily
Housing Properties. The rule proposes to establish a system for ranking
multifamily housing properties covered by the February 9, 1999 Baseline
Notice. For these properties, the ranking is based on the physical
inspection results of the baseline review. Newly endorsed multifamily
properties will be inspected in the first year after endorsement and
then ranked in accordance with the process described in this proposed
rule.
(a) Physical Condition Designations. Depending upon the results of
its physical condition inspection, a multifamily housing property would
be assigned one of the following designations: (1) Standard 1
performing property; (2) standard 2 performing property; or (3)
standard 3 performing property. The physical condition designation
assigned to a multifamily housing property will be based on numerical
thresholds developed as a result of the REAC's baseline review of
multifamily properties. This rule does not propose to establish at this
time the numerical scores that will distinguish between the three
categories of properties. HUD believes that meaningful numerical
thresholds can only be determined after the REAC substantially
completes its baseline review (using HUD's new uniform and computerized
physical inspection protocol), and the REAC has had sufficient time to
properly evaluate this data.
(b) Methodology for Ranking. When the baseline review is
substantially completed, multifamily housing properties will be ranked
in accordance with the following methodology. Multifamily housing
properties are scored on the basis of 100 point scale. For each
designation category, the lowest score in the category becomes the
numerical threshold for that category.
(i) Standard 1 Performing Properties--Highest 20 Percent. Covered
multifamily housing properties scoring in the highest 20 percent of a
physical

[[Page 66532]]

condition inspection will be designated standard 1 performing
properties and will be required to undergo a physical inspection once
every three (3) years.
(ii) Standard 2 Performing Properties--Next Highest 30 Percent.
Covered multifamily housing properties scoring in the next highest 30
percent of a physical condition inspection will be designated standard
2 performing properties and only will be required to undergo physical
inspection once every two (2) years.
(iii) Standard 3 Performing Properties--Remaining 50 Percent.
Covered multifamily housing properties scoring in the remaining 50
percent will be designated standard 3 performing properties, will be
required to continue with the annual physical inspection currently
required under covered HUD programs.
Example of Designation Process. To illustrate more clearly how the
ranking will be done, assume for purposes of this example that the
baseline review shows that those multifamily housing properties that
rank in the top 20 percent have physical condition scores ranging from
100 to 80 with 100 being the maximum number of points that can be
received for a physical condition inspection. As a result of this
baseline review, all properties scoring 80 and above will be designated
standard 1 performing properties.
Further assume for purposes of this illustration that the
multifamily housing properties that fall into the next category of 30
percent have physical condition scores ranging from less than 80 but at
least 70. These properties will be designated standard 2 performing
properties, and all properties thereafter scoring at least 70, but less
than 80, will be standard 2 performing properties.
The remaining 50 percent of multifamily properties will have scores
of less than 70. These properties will be designated standard 3
performing properties, with the threshold being less than 70.
Resolving Exigent Health and Safety Deficiencies. Owners of
multifamily housing properties scoring in a standard 1 or standard 2
range which have been cited by the REAC as having a Exigent Health and
Safety deficiency(s) are obligated to resolve the deficiency(s) to be
classified as standard 1 and standard 2 properties. The owners must
certify and provide reasonable evidence that the deficiency(s) has been
resolved to the applicable Multifamily Hub Director.
Meeting Physical Condition Standards Notwithstanding Performance
Designation. Regardless of the performance designation assigned to an
owner's property, an owner is obligated to maintain its property in
accordance with HUD's uniform physical condition standards as required
by 24 CFR part 5, subpart G, the Regulatory Agreement and/or the
Housing Assistance Payment (HAP) Contract. Good management principles
require an owner to conduct routine inspections of its projects,
develop improvement plans, and again, maintain its property to meet the
standard of decent, safe, sanitary and in good repair.
(c) Inspecting and Scoring Individual Properties. The process by
which scores are developed was discussed in HUD's notice, ``Public
Housing Assessment System; Notice of Physical Condition Scoring,''
published in the Federal Register on May 13, 1999, and again on June
23, 1999. Although this notice was directed to public housing agencies
and describes the physical condition scoring process under the Public
Housing Assessment System, the process for determining scores is the
same for multifamily housing properties. The physical condition scoring
process for both public housing and multifamily properties is based on
HUD's uniform physical condition standards and use of HUD's uniform
physical inspection protocols.
The physical condition designation assigned to a multifamily
housing property does not prohibit HUD (the REAC, DEC or the Office of
Housing) from conducting an inspection on any covered multifamily
housing property at any time that HUD has reason to believe that the
property has deteriorated significantly, or if information is brought
to HUD that the physical condition of the property has deteriorated
significantly, since the date that the last inspection was conducted.
If HUD's new inspection verifies that the multifamily housing property
has deteriorated significantly, HUD may revise the physical condition
designation of the property, or take whatever action may be
appropriate.
In addition to physical inspections performed to determine the
physical condition of multifamily properties as provided by this rule,
HUD may perform interim inspections for certain purposes such as
section 8 contract renewal, partial release of security, permission to
sell the security, or in connection with mortgage restructuring.
(2) Technical Review of Physical Inspection Score Results. This
rule proposes to adopt as one of the administrative processes for
multifamily housing properties, the technical review of physical
inspection results described in HUD's notice, ``Real Estate Assessment
Center; Technical Review of Physical Inspection Results,'' published in
the Federal Register on May 13, 1999. The Federal Register notice
describes the process for requesting (of the REAC) and the granting (by
the REAC) a technical review of physical inspection results for public
housing agencies. Based on that notice, this rule proposes to adopt the
following procedures for covered multifamily housing properties.
Review of Physical Inspection Report and Identification of
Objectively Verifiable and Material Error. Upon completion of a
physical inspection of a multifamily housing property, the REAC will
provide the owner with a physical inspection report. The physical
inspection report includes a copy of the physical inspection results,
the physical condition score and ranking, an explanation of the score
and the owner's rights to request a technical review no later than 30
days following issuance of the physical inspection results to the
owner. The rule imposes the responsibility on the owner to carefully
review the report, particularly those items classified as exigent
health and safety (EHS). All EHS items must be mitigated immediately,
and the owner is required to file a written report with the local HUD
office within 72 hours of the inspection. The owner is also responsible
for conducting its own survey of the total project based on the REAC's
physical inspection findings.
If the owner reasonably believes that an objectively verifiable and
material error (or errors) occurred in the inspection of an owner's
multifamily housing property, which, if corrected, would result in a
significant improvement in the property's overall score, the owner may
request a technical review of the physical inspection results of the
property.
Request for Technical Review and Burden of Proof. Until electronic
transmission is arranged between HUD and the owner, the owner has a
period of 30 calendar days to (i) review the physical inspection
results and property score and determine if the results and score
indicate that an objectively verifiable and material error (or errors)
occurred in the inspection, which if corrected would result in a
significant improvement in the property's overall score; and (ii)
request a technical review by the REAC of the property's physical
inspection results. A request for a technical review of physical
inspection results must be submitted in writing to the Director of the
Real Estate Assessment Center and must be received by the REAC, with a
copy to the Multifamily Hub Director (MFD), no later than the 30th
calendar day

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following issuance of the physical inspection report to the owner. Note
that the review period of 30 days will be the requisite review period
only until electronic transmission of the physical inspection report is
established. When electronic transmission is arranged between HUD and
the owner, the review period will be 15 calendar days.
The request must be received by the REAC and be accompanied by the
owner's reasonable evidence that an objectively verifiable and material
error (or errors) occurred, which if corrected would result in a
significant improvement in the property's overall score. A technical
review of physical inspection results will not be conducted based on
conditions that were corrected subsequent to the inspection nor will
the REAC consider a request for a technical review that is based on a
challenge to the inspector's findings as to the severity of a
deficiency (e.g., categorization of the deficiency as minor, major or
severe).
The burden of proof rests with the owner to reasonably demonstrate
that an objectively verifiable and material error occurred in the
inspection through the submission of evidence, which would result in a
significant improvement in the property's overall score. To support its
request for a technical review of the physical inspection results, the
owner may submit photographic evidence, written material from an
objective source such as a local fire marshal or building code
official, or other similar evidence.
What Constitutes Material Errors. An objectively verifiable
material error must be present to allow for a technical review of
physical inspection results. Material errors are those that exhibit
specific characteristics and meet specific thresholds. The three types
of material errors are as follows.
1. Building Data Error. A building data error occurs if the
inspection includes the wrong building or a building that was not owned
by the subject project owner, including common or site areas that were
not a part of the property. Incorrect building data that does not
affect the score, such as the address, building name, year built, etc.,
would not be considered material, but is information that HUD needs to
know, and will be corrected upon notice to the REAC.
2. Unit Count Error. A unit count error occurs if the total number
of units involved in the scoring process is incorrect. Since the
scoring process uses total units, the REAC will examine instances where
the participant can provide evidence that the total units used is
incorrect.
3. A Non-Existent Deficiency Error. A non-existent deficiency error
occurs if the inspection cites a deficiency that does not exist.
What Constitutes Significant Improvement. Significant improvement
refers to the correction of a material error, asserted by the owner,
which causes the score for the owner's property to improve by crossing
an administratively significant threshold (for example, the property
would be redesignated from standard 3 performing to standard 2
performing or from standard 2 performing to standard 1 performing).
Determining Whether Material Error Occurred and What Action Is
Warranted. Upon receipt of the owner's request for technical review of
a property's physical inspection results, the REAC will evaluate the
owner's property file and the evidence provided by the owner that an
objectively verifiable and material error occurred which, if corrected,
would result in a significant improvement in the property's overall
score. If the REAC's evaluation determines that an objectively
verifiable and material error (or errors) has been reasonably
documented by the owner and if corrected would result in a significant
improvement in the property's overall score, then the REAC shall take
one or a combination of the following actions: (1) Undertake a new
inspection; (2) correct the inspection report; or (3) issue a new
physical condition score.
For an owner to understand how the REAC may conclude that a
significant improvement may result from a new inspection, the owner may
use the REAC's document titled ``Items, Weights and Criticality
Levels'' to determine whether a significant improvement in the
property's score may result from a new inspection. This document was
included as Appendix 1 in the Notice of Physical Condition Scoring,
published in the Federal Register on May 13, 1999, and republished on
June 23, 1999 (64 FR 33650). The different severity levels of
deficiencies (severe, major and minor) are defined in the REAC's
``Dictionary of Deficiencies Definitions,'' which is included as
Appendix 2 in the Notice of Physical Condition Score published on May
13, 1999. These two documents are also available on the REAC Internet
Site at http://www.hud.gov/reac.
Responsibility for the Cost of a New Inspection. If a new
inspection score results in a significant improvement from the original
physical inspection score, HUD shall bear the expense of the new
inspection. If no significant improvement in the score is shown, then
the owner must bear the expense of the new inspection. The cost of the
new inspection, if paid by the owner, is not a valid project operating
expense. The new inspection score will be considered the final score.
(3) Adjustment of Physical Condition Score Based on Considerations
Other Than Technical Review and Reinspection. Under certain
circumstances, it may be appropriate for HUD to review the results of a
physical inspection which are anomalous or have an incorrect result due
to facts and circumstances affecting the inspected property which are
not reflected in the inspection or reflected inappropriately in the
inspection. Circumstances such as, but not necessarily limited to,
inconsistencies between local code requirements and the HUD physical
inspection protocol; conditions which are permitted by variance or
license or which are preexisting physical features non-conformities and
are inconsistent with the HUD physical condition protocol; or cases
where the owner has been scored for elements (e.g., roads, sidewalks,
mail boxes, resident owned appliances, etc.) that it does not own and
is not responsible for maintaining, may be addressed by a formal
procedure to be initiated by the owner's notification to the applicable
HUD Field Office and submission to that office of appropriate proof of
the anomalous or inappropriate application. This process may result in
a reinspection and/or rescoring of the inspection based on Office of
Housing recommendation after review and approval of the owner's
submission of appropriate proof of the anomalous or inappropriate
application. An owner may submit the request for this adjustment either
prior to or after the physical inspection has been concluded. HUD shall
define, by notice, the procedures to be followed to address
circumstances described in paragraph (e) of this section. The
procedures outlined in this Notice shall be binding on the REAC, the
Office of Housing and the DEC. The notice will be applicable to both
public housing and multifamily properties.

The files of any of the multifamily housing properties may be
submitted to HUD's Departmental Enforcement Center (DEC) or to the
appropriate MFD for evaluation, or both, at the discretion of the
Office of Housing. For these properties, the following will occur:
(1) Notification to Owner of Submission of Property File to the MFD
and DEC. The Department will provide

[[Page 66534]]

for written notification to the owner that the file on the owner's
property is being submitted to the MFD and/or DEC for evaluation. The
written notification will be provided by HUD at the time the REAC
issues the physical inspection report to the owner or at such other
time as referral occurs.
(2) 30-Day Period for Owner to Provide the DEC with Supporting and
Relevant Information and Documentation. The owner has 30 calendar days,
from the date of written notification to the owner, to provide
comments, proposals, or any other information which will assist the MFD
and DEC in conducting a comprehensive evaluation of the property. A
proposal provided by an owner may include the owner's plan to correct
deficiencies (corrective action plan), which is encouraged by the DEC.
During the 30-day response time available to the owner, the DEC may
encourage the owner to submit a corrective action plan. The corrective
action plan, if timely submitted during the 30-day period (whether on
the owner's initiative or at the request of the DEC), may serve as
additional information for the DEC to consider in determining
appropriate action to take at the conclusion of the evaluation period.
A corrective action plan may be required of the owner at the conclusion
of the DEC's evaluation of the property.
(3) Evaluation of the Property. During the evaluation period, the
DEC will perform an analysis of the multifamily housing property. The
evaluation may include input from tenants, HUD multifamily officials,
elected officials and others as may be appropriate. The MFD will assist
with the evaluation of the property. The DEC will have primary
responsibility for the conclusion of the evaluation of the property
after taking into consideration the input of the individuals and groups
listed above. The DEC's evaluation may include a site visit to the
owner's property.
The DEC is committed to perform its evaluation as quickly as
possible. The comments and proposals of the owners which have been
provided since the REAC inspection, and any repairs that have been made
since the REAC inspection, will be given serious consideration during
the DEC evaluation period. During this evaluation period, since the
owner and the Multifamily Hub have now been made aware of serious
deficiencies at the property which resulted in the low REAC score, the
owner must exert a full measure of oversight and ensure that all
deficiencies are corrected.
(4) Continuing Responsibilities of HUD Multifamily Program Offices
and Mortgagee. During the period of DEC evaluation, HUD's multifamily
program offices continue to be responsible for routine asset management
tasks on properties and all servicing actions (e.g., rent increase
decisions, releases from reserve account approvals). In addition,
during this period of evaluation, for insured mortgages, the mortgagee
shall continue to carry out its duties and responsibilities with
respect to the mortgage.
As part of its evaluation and development of the compliance plan
(discussed under Section (D) below), the DEC will put together a team
to evaluate and develop a corrective action plan. The Multifamily Hub
Program Office will assign a Senior Project Manager to the team, who
will be a working member of the team and serve as team liaison to the
HUB Director. If conflict or an impasse develops during the team's
assignment, the liaison will notify the Multifamily Hub Director who
will work to mitigate and eliminate all conflict. The Multifamily Hub
Director may, if appropriate, enlist the assistance of the Office of
Housing/DEC liaison in Headquarters to resolve any disputes.

(D) Enforcement Action

If, at the conclusion of the evaluation period, the DEC determines
that enforcement action is appropriate, the DEC will provide written
notification to the owner of the DEC's decision to formally accept the
property for enforcement purposes.
(1) DEC Owner Compliance Plan. After notification to the owner of
the DEC's decision, the DEC will produce a proposed action plan (DEC
Compliance Plan), the purpose of which is to improve the physical
condition of the owner's property and correct any other known
violations by the owner of its regulatory, contractual or other
obligations. The DEC Compliance Plan will describe (1) the actions that
will be required of the owner to correct, mitigate or eliminate
identified property deficiencies, problems, hazards, and/or address
legal violations by owners, and (2) the period of time within which
these actions must be completed. The DEC Compliance Plan will specify
the compliance responsibilities of the owner.
The DEC Compliance Plan will be submitted to the MFD for review and
concurrence. If the MFD does not concur, the DEC Compliance Plan will
be submitted to the Deputy Assistant Secretary for Housing and the
Deputy Director of the DEC for review and concurrence. If the DEC
Compliance Plan remains unapproved, a final decision on the plan will
be made by HUD's Deputy Secretary in consultation with the General
Counsel, the Assistant Secretary for Housing, and the Director of the
DEC.
The owner will be provided a period of 30 calendar days to review
the DEC Compliance Plan and respond to the DEC. If the owner agrees to
comply with the DEC Compliance Plan, the plan will be forwarded to the
appropriate Multifamily Office for implementation and monitoring of
completion of the plan's requirements.
(2) Counter Compliance Plan Proposal By Owner. The owner may submit
a counter proposal to the DEC Compliance Plan. An owner's counter
proposal to a DEC Compliance Plan must be submitted no later than the
30th day following submission of the DEC Compliance Plan to the owner.
The DEC, in coordination with the MFD, may enter into discussions with
the owner to achieve agreement to a revised DEC Compliance Plan. If the
owner and the DEC agree on a revised DEC Compliance Plan, the revised
plan will be forwarded to the appropriate Multifamily Office for
implementation and monitoring of completion of the plan's requirements.
(3) Non-Cooperation and Non-Compliance by Owner. If at the
conclusion of the 30th calendar day following submission of the DEC
Compliance Plan to the owner, the DEC receives no response from the
owner, or the owner refuses to accept the DEC Compliance Plan or to
present an acceptable counter compliance plan proposal, or if the owner
accepts the DEC Compliance Plan or revised DEC Compliance Plan, but
refuses to take the actions required of the owner in the plan, the DEC
may take appropriate enforcement action.
(4) No Limitation on Existing Enforcement Authority. The proposed
rule will emphasize that the administrative process established for
multifamily housing properties will not prohibit the Office of Housing,
the DEC or HUD generally to take whatever immediate action may be
necessary, as authorized under existing statutes, regulations,
contracts or other documents, to protect HUD's financial interests in
multifamily properties and to protect the residents of these
properties.

(E) Clarification of Certain Issues Related to Physical Inspection of
Multifamily Housing Properties

(1) Recurring Inspection of Properties. In response to concerns
raised at the

[[Page 66535]]

time of issuance of the September 1, 1998, final rule, about the
possibility of more inspections being performed prior to the property's
normal inspection schedule, this rule proposes to clarify that any
additional inspection will occur under the following circumstances: (i)
The REAC's baseline inspection of the property after the mortgagee has
conducted its own inspection in accordance with existing requirements;
(ii) at the request of the owner in accordance with the procedures
discussed earlier in this preamble; (iii) as part of the administrative
review process described in this proposed rule; (iv) in response to
HUD's belief that the property has deteriorated significantly since its
previous physical inspection, or information brought to HUD that a
property has significantly deteriorated since its previous physical
inspection; (v) as part of quality control to assure that inspections
are being conducted properly; (vi) for special purposes including but
not limited to partial release of security, permission to sell the
security, or in connection with mortgage restructuring; or (vii) to
conduct an inspection in conjunction with any possible enforcement
action by HUD.
(2) Information about the Physical Inspection System. In the
preamble to the September 1, 1998, uniform physical conditions final
rule, HUD advised that it would make the inspection software and
guidebook available from the REAC. Both the software and guidebook are
available from the REAC web page at www.hud.gov/reac, or through the
REAC Customer Service Center at no cost (besides nominal cost of
shipping) by calling 1-888-245-4860. Public versions of the physical
inspection software will be available on compact disk (CD) and can be
obtained by calling the REAC Customer Service Center. REAC may update
or revise the physical inspection software and guidebook from time to
time. When requesting the physical inspection software and guidebook,
the requestor will be asked to provide the Uniform Resource Locator
(URL) for their firm or organization, the requester's e:mail address
and post office mailing address.
(3) Material Alteration of Physical Inspection Software. In
response to concerns raised at the time of issuance of the September 1,
1998, final rule, about the cost of the physical inspection protocol,
HUD advises that it will not materially alter the physical inspection
requirements in a manner which would materially increase the cost of
performing the inspection.

(F) Enforcement Issues of Concern to Small Entities

The Small Business Regulatory Enforcement Fairness Act of 1996
(Pub. L. 104-121, 110 Stat. 847, approved March 29, 1996) (``SBREFA'')
provides, among other things, for agencies to establish specific
policies or programs to assist small entities. Small entities include
small businesses, nonprofit organizations, and small governmental
jurisdictions. On May 21, 1998 (63 FR 28214), HUD published a Federal
Register notice describing HUD's actions on implementation of SBREFA.
Section 223 of SBREFA requires agencies that regulate the
activities of small entities to establish a policy or program to reduce
or, under appropriate circumstances, waive civil penalties when a small
entity violates a statute or regulation. Where penalties are determined
appropriate, HUD's policy is to consider: (1) The nature of the
violation (the violation must not be one that is repeated or multiple,
willful, criminal or poses health or safety risks), (2) whether the
entity has shown a good faith effort to comply with the regulations;
and (3) the resources of the regulated entity. Depending upon the
circumstances surrounding the violation, it is not HUD's intent to put
any individual or entity out of business by the penalties or settlement
amounts paid to the Federal Government.
With respect to DEC enforcement actions taken in accordance with
this proposed rule, HUD is cognizant that section 222 of SBREFA
requires the Small Business and Agriculture Regulatory Enforcement
Ombudsman to ``work with each agency with regulatory authority over
small businesses to ensure that small business concerns that receive or
are subject to an audit, on-site inspection, compliance assistance
effort or other enforcement related communication or contact by agency
personnel are provided with a means to comment on the enforcement
activity conducted by this personnel.'' To implement this statutory
provision, the Small Business Administration has requested that
agencies include the following language on agency publications and
notices which are provided to small businesses concerns at the time the
enforcement action is undertaken. The language is as follows:

Your Comments Are Important

The Small Business and Agriculture Regulatory Enforcement
Ombudsman and 10 Regional Fairness Boards were established to
receive comments from small businesses about federal agency
enforcement actions. The Ombudsman will annually evaluate the
enforcement activities and rate each agency's responsiveness to
small business. If you wish to comment on the enforcement actions of
[insert agency name], call 1-888-REG-FAIR (1-888-734-3247).

As HUD stated in its May 21, 1998 notice, HUD intends to work with
the Small Business Administration to provide small entities with
information on the Fairness Boards and National Ombudsman program, at
the time enforcement actions are taken, to ensure that small entities
have the full means to comment on the enforcement activity conducted by
HUD.

V. Findings and Certifications

Paperwork Reduction Act Statement

The information collection requirements contained in this rule have
been submitted to the Office of Management and Budget for review under
section 3507(d) of the Paperwork Reduction Act of 1995 (44 U.S.C.
Chapter 35).
Estimates of the total reporting and recordkeeping burden that will
result from the collection of information are as follows:
Reporting and Recordkeeping Burden:

----------------------------------------------------------------------------------------------------------------
Est. Avg. time
Section reference Number of Annual freq. of for requirement Est. annual
parties requirement (hours) burden (hrs.)
----------------------------------------------------------------------------------------------------------------
Sec. 200.857............................... 29,000 1 3 87,000
Total Reporting and Recordkeeping Burden
(Hours)................................
----------------------------------------------------------------------------------------------------------------

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;

[[Page 66536]]

(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 proposal. Comments must be
received within sixty (60) days from the date of this proposal.
Comments must refer to the proposal by name and docket number (FR-4452)
and must be sent to:

Joseph F. Lackey, Jr., HUD Desk Officer, Office of Management and
Budget, New Executive Office Building, Washington, DC 20503
and
Oliver Walker, Reports Liaison Officer, Office of the Assistant
Secretary for Housing--Federal Housing Commissioner, Department of
Housing and Urban Development, 451--7th Street, SW, Room 4238,
Washington, DC 20410

Executive Order 12866

The Office of Management and Budget (OMB) reviewed this proposed
rule under Executive Order 12866, Regulatory Planning and Review,
issued by the President on September 30, 1993. OMB determined that this
proposed rule is a ``significant regulatory action,'' as defined in
section 3(f) of the Order (although not economically significant, as
provided in section 3(f)(1) of the Order). Any changes made in this
proposed rule subsequent to its submission to OMB are identified in the
docket file, which is available for public inspection between 7:30 a.m.
and 5:30 p.m. weekdays in the Office of the Rules Docket Clerk, Office
of General Counsel, Room 10276, Department of Housing and Urban
Development, 451 Seventh Street, SW, Washington, DC.

Environmental Impact

A Finding of No Significant Impact with respect to the environment
has been made in accordance with HUD regulations in 24 CFR part 50 that
implement section 102(2)(C) of the National Environmental Policy Act of
1969 (42 U.S.C. 4223). The Finding of No Significant Impact is
available for public inspection between 7:30 a.m. and 5:30 p.m.
weekdays in the Office of the Rules Docket Clerk, Office of General
Counsel, Room 10276, Department of Housing and Urban Development, 451
Seventh Street, SW, Washington, DC.

Regulatory Flexibility Act

The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed this proposed rule before publication and
by approving it certifies that this proposed rule is not anticipated to
have a significant economic impact on a substantial number of small
entities. As stated in the June 30, 1998, proposed rule and September
1, 1998, final rule on uniform physical condition standards, all HUD
housing has been subject to physical condition standards and a physical
inspection requirement. There are statutory directives to maintain HUD
housing in a condition that is decent, safe, and sanitary. The rules on
uniform physical conditions standards and uniform physical inspections
do not alter these requirement, nor do they shift responsibility with
respect to who conducts the physical inspection of the property. The
entities and individuals responsible for the inspection of HUD
subsidized properties remain responsible. This proposed rule is a
follow-up to the September 1, 1998, final rule on uniform physical
inspection standards by establishing an administrative process by which
multifamily housing properties are analyzed, scored and ranked. With
the exception of exigent circumstances, the administrative process, as
described in the preamble, allows for appropriate and reasonable notice
and opportunity for review and comment, and a reasonable period for
corrective action. With respect to the physical inspection process
itself, in the preamble to this proposed rule, HUD reiterated its
commitment to provide the software at no cost to covered entities as
well as the accompanying guidebooks and to publish a notice that gives
covered entities reasonable notice of when the software and guidance
are available. With the implementation of any new or modified program
requirement, HUD intends to provide guidance to the covered entities,
particularly small entities, to assist them in understanding the
changes being made. Notwithstanding HUD's determination that this
proposed rule would not have a significant economic impact on small
entities, HUD specifically invites comments regarding alternatives to
this proposed rule that would meet HUD's objectives as described in
this preamble.

Executive Order, Federalism

Executive Order 13132 (entitled ``Federalism'') prohibits, to the
extent practicable and permitted by law, an agency from promulgating a
regulation that has federalism implications and either imposes
substantial direct compliance costs on State and local governments and
is not required by statute, or preempts State law, unless the relevant
requirements of section 6 of the Executive Order are met. This rule
does not have federalism implications and does not impose substantial
direct compliance costs on State and local governments or preempt State
law within the meaning of the Executive Order.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4; approved March 22, 1995) (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 proposed
rule would not impose any Federal mandates on any State, local, or
tribal governments, or on the private sector, within the meaning of the
UMRA.

Catalog of Federal Domestic Assistance

The Catalog of Federal Domestic Assistance numbers for the
programs that would be affected by this proposed rule are:

14.126--Mortgage Insurance--Cooperative Projects (Section 213)
14.129--Mortgage Insurance--Nursing Homes, Intermediate Care
Facilities, Board and Care Homes and Assisted Living Facilities
(Section 232)
14.134--Mortgage Insurance--Rental Housing (Section 207)
14.135--Mortgage Insurance--Rental and Cooperative Housing for
Moderate Income Families and Elderly, Market Rate Interest (Sections
221(d) (3) and (4))
14.138--Mortgage Insurance--Rental Housing for Elderly (Section 231)
14.139--Mortgage Insurance--Rental Housing in Urban Areas (Section
220 Multifamily)
14.157--Supportive Housing for the Elderly (Section 202)
14.181--Supportive Housing for Persons with Disabilities (Section
811)
14.188--Housing Finance Agency (HFA) Risk Sharing Pilot Program
(Section 542(c))
14.856--Lower Income Housing Assistance Program--Section 8 Moderate
Rehabilitation

List of Subjects in 24 CFR Parts 5 and 200

Administrative practice and procedure, Aged, Claims, Drug abuse,
Drug traffic control, Grant programs--housing and community
development, Grant programs--Indians, Individuals with disabilities,
Loan programs--housing and community development, Low- and moderate-
income housing, Mortgage insurance, Pets, Public

[[Page 66537]]

housing, Rent subsidies, Reporting and recordkeeping requirements.

Accordingly, for the reasons stated in the preamble, title 24 of
the CFR is 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. 3535(d), unless otherwise noted.

2. In Sec. 5.701, paragraph (a) is revised, and a new paragraph (b)
is added to read as follows:

Sec. 5.701 Applicability.

(a) This subpart applies to housing assisted under the HUD programs
listed in 24 CFR 200.853(a).
(b) This subpart applies to housing with mortgages insured or held
by HUD, or housing that is receiving assistance from HUD, under the
programs listed in 24 CFR 200.853(b).
* * * * *

PART 200--INTRODUCTION TO FHA PROGRAMS

3. The authority citation for 24 CFR part 200 continues to read as
follows:

Authority: 12 U.S.C. 1701-1715-18; 42 U.S.C. 2535(d).

4. A new subpart P is added to 24 CFR part 200 to read as follows:

Subpart P--Physical Condition of Multifamily Properties

Sec.
200.850 Purpose.
200.853 Applicability.
200.855 Physical condition standards.
200.857 Administrative process for scoring and ranking the physical
condition of multifamily housing properties.

Subpart P--Physical Condition of Multifamily Properties

Sec. 200.850 Purpose.

The purpose of this subpart is to establish the physical conditions
standards and physical inspection requirements that are applicable to
certain multifamily housing properties.

Sec. 200.853 Applicability.

This subpart applies to:
(a) Housing assisted by HUD under the following programs:
(1) All Section 8 project-based assistance. ``Project-based
assistance'' means Section 8 assistance that is attached to the
structure (see 24 CFR 982.1(b)(1) regarding the distinction between
``project-based'' and ``tenant-based'' assistance);
(2) Section 202 Program of Supportive Housing for the Elderly
(Capital Advances);
(3) Section 811 Program of Supportive Housing for Persons with
Disabilities (Capital Advances); and
(4) Section 202 loan program for projects for the elderly and
handicapped (including 202/8 projects and 202/162 projects).
(b) Housing with mortgages insured or held by HUD, or housing that
is receiving insurance from HUD, under the following authorities:
(1) Section 207 of the National Housing Act (NHA) (12 U.S.C. 1701
et seq.) (Rental Housing Insurance);
(2) Section 213 of the NHA (Cooperative Housing Insurance);
(3) Section 220 of the NHA (Rehabilitation and Neighborhood
Conservation Housing Insurance);
(4) Section 221(d)(3) of the NHA (Market Interest Rate (MIR)
Program);
(5) Section 221(d)(3) and (5) of the NHA (Below Market Interest
Rate (BMIR) Program);
(6) Section 221(d)(4) of the NHA (Housing for Moderate Income and
Displaced Families);
(7) Section 231 of the NHA (Housing for Elderly Persons);
(8) Section 232 of the NHA (Mortgage Insurance for Nursing Homes,
Intermediate Care Facilities, Assisted Living Facilities, Board and
Care Homes);
(9) Section 234(d) of the NHA (Rental) (Mortgage Insurance for
Condominiums);
(10) Section 236 of the NHA (Rental and Cooperative Housing for
Lower Income Families);
(11) Section 241 of the NHA (Supplemental Loans for Multifamily
Projects); and
(12) Section 542(c) of the Housing and Community Development Act of
1992 (12 U.S.C. 1707 note) (Housing Finance Agency Risk Sharing
Program).

Sec. 200.855 Physical condition standards and physical inspection
requirements.

The physical condition standards and physical inspection
requirements in 24 CFR part 5, subpart G, are applicable to the
properties assisted or insured that are listed in Sec. 200.853.

Sec. 200.857 Administrative process for scoring and ranking the
physical condition of multifamily housing properties.

(a) Scoring and ranking of the physical condition of multifamily
housing properties. (1) HUD's Real Estate Assessment Center (REAC) will
score and rank the physical condition of certain multifamily housing
insured properties listed in Sec. 200.853 upon the REAC's completion of
its physical inspection of these properties (the baseline review), as
described in HUD's Baseline Review Notice published on February 9,
1999. Newly endorsed multifamily properties will be inspected in the
first year after endorsement and then ranked in accordance with the
process described in this proposed rule.
(2) Depending upon the results of its physical condition
inspection, a multifamily housing property will be assigned one of
three designations--standard 1 performing, standard 2 performing and
standard 3 performing--in accordance with the ranking process described
in paragraph (b) of this section.
(b) Methodology for Ranking. (1) Multifamily housing properties
will be ranked in accordance with the methodology provided in this
paragraph (b). Multifamily housing properties are scored on the basis
of 100 point scale. For each designation category, the lowest score in
the category becomes the numerical threshold for that category.
(i) Standard 1 Performing Property--Highest 20 Percent. If a
property scores in the highest 20 percent of the physical condition
inspection of multifamily housing properties, the property will be
designated a standard 1 performing property. Properties designated as
standard 1 performing properties will be required to undergo a physical
inspection once every three (3) years.
(ii) Standard 2 Performing Property--Next Highest 30 Percent. If a
property scores in the next highest 30 percent of the physical
condition inspection of multifamily housing properties, the property
will be designated a standard 2 performing property. Properties
designated as standard 2 performing properties will be required to
undergo a physical inspection once every two (2) years.
(iii) Standard 3 Performing Property--Remaining 50 Percent. If a
property scores in the remaining 50 percent in the physical condition
inspection of multifamily housing properties, the property will be
designated a standard 3 performing property. Properties designated as
standard 3 performing properties will continue to undergo an annual
physical inspection as currently required under covered HUD programs.
(2) Owners of multifamily housing properties scoring in a standard
1 or standard 2 range which have been cited by the REAC as having a
Exigent Health and Safety deficiency(s) are obligated to resolve the
deficiency(s) to be classified as standard 1 and standard 2 properties.
The owners must certify and provide reasonable evidence that the

[[Page 66538]]

deficiency(s) has been resolved to the applicable Multifamily Hub
Director.
(3) Regardless of the performance designation assigned to an
owner's property, an owner is obligated to maintain its property in
accordance with HUD's uniform physical condition standards as required
by 24 CFR part 5, subpart G, the Regulatory Agreement and/or the
Housing Assistance Payment (HAP) Contract. Good management principles
require an owner to conduct routine inspections of its projects,
develop improvement plans, and again, maintain its property to meet the
standard of decent, safe, sanitary and in good repair.
(c) Owner's review of physical inspection report and identification
of objectively verifiable and material error. (1) Upon completion of a
physical inspection of a multifamily housing property, the REAC will
provide the owner with a physical inspection report. The physical
inspection report includes a copy of the physical inspection results,
the physical condition score and ranking, an explanation of the score
and the owner's right to request a technical review of the physical
inspection results as described in paragraph (d) of this section.
(2) The owner must carefully review the report, particularly those
items classified as exigent health and safety (EHS). The owner is also
responsible for conducting its own survey of the total project based on
the REAC's physical inspection findings. The owner must mitigate all
EHS items immediately, and the owner must file a written report with
the local HUD office within 72 hours of the inspection.
(3) If, following review of the physical inspection results and
score, the owner reasonably believes that an objectively verifiable and
material error (or errors) occurred in the inspection, which, if
corrected, will result in a significant improvement in the property's
overall score, the owner may request a technical review within the
following period, as applicable:
(i) 15 calendar days if the results and score are electronically
transmitted to the owner; or
(ii) 30 calendar days if the results and score are transmitted to
the owner by hard copy by certified mail.
(d) Technical review of physical inspection results. A request for
a technical review of physical inspection results must be submitted in
writing to the Director of the Real Estate Assessment Center and must
be received by the REAC no later than the 15th calendar day or 30th
calendar day, as applicable under paragraph (c)(3) of this section,
following issuance of the physical inspection report to the owner.
(1) Request for technical review. The request must be accompanied
by the owner's reasonable evidence that an objectively verifiable and
material error (or errors) occurred which if corrected will result in a
significant improvement in the overall score of the owner's property. A
technical review of physical inspection results will not be conducted
based on conditions that were corrected subsequent to the inspection.
Upon receipt of this request from the owner, and recommendation of the
appropriate HUD Multifamily Hub Director, the REAC will review the
physical inspection and the owner's evidence. If the REAC's review
determines that an objectively verifiable and material error (or
errors) has been documented and that it is likely to result in a
significant improvement in the property's overall score, the REAC will
take one or a combination of the following actions: undertake a new
inspection; correct the original inspection; or issue a new physical
condition score.
(2) Burden of proof that error occurred rests with owner. The
burden of proof rests with the owner to demonstrate that an objectively
verifiable and material error (or errors) occurred in the REAC's
inspection through submission of evidence, which if corrected will
result in a significant improvement in the property's overall score. To
support its request for a technical review of the physical inspection
results, the owner may submit photographic evidence, written material
from an objective source such as a local fire marshal or building code
official, or other similar evidence.
(3) Material errors. An objectively verifiable material error must
be present to allow for a technical review of physical inspection
results. Material errors are those that exhibit specific
characteristics and meet specific thresholds. The three types of
material errors are as follows.
(i) Building data error. A building data error occurs if the
inspection includes the wrong building or a building that was not owned
by the property, including common or site areas that were not a part of
the property. Incorrect building data that does not affect the score,
such as the address, building name, year built, etc., would not be
considered material, but is of great interest to HUD and will be
corrected upon notice to the REAC.
(ii) Unit count error. A unit count error occurs if the total
number of units considered in scoring is incorrect. Since scoring uses
total units, the REAC will examine instances where the participant can
provide evidence that the total units used is incorrect.
(iii) A non-existent deficiency error. A non-existent deficiency
error occurs if the inspection cites a deficiency that does not exist.
(4) Significant improvement. Significant improvement refers to the
correction of a material error, asserted by the owner, which causes the
score for the owner's property to cross an administratively significant
threshold (for example, the property would be redesignated from
standard 3 performing to standard 2 performing or from standard 2
performing to standard 1 performing).
(5) Determining whether material error occurred and what action is
warranted. Upon receipt of the owner's request for technical review of
a property's physical inspection results, the REAC will evaluate the
owner's property file and the evidence provided by the owner that an
objectively verifiable and material error occurred which, if corrected,
would result in a significant improvement in the property's overall
score. If the REAC's evaluation determines that an objectively
verifiable and material error (or errors) has been reasonably
documented by the owner and if corrected would result in a significant
improvement in the property's overall score, then the REAC shall take
one or a combination of the following actions:
(i) Undertake a new inspection;
(ii) Correct the inspection report; or
(iii) Issue a new physical condition score.
(6) Responsibility for the cost of a new inspection. If a new
inspection is undertaken by the REAC and the new inspection score
results in a significant improvement in the property's overall score,
then HUD shall bear the expense of the new inspection. If no
significant improvement occurs, then the owner must bear the expense of
the new inspection. The inspection cost of a new inspection, if paid by
the owner, is not a valid project operating expense. The new inspection
score will be considered the final score.
(e) Adjustment of physical condition score based on considerations
other than technical review and reinspection. Under certain
circumstances, it may be appropriate for HUD to review the results of a
physical inspection which are anomalous or have an incorrect result due
to facts and circumstances affecting the inspected property which are
not reflected in the inspection or reflected inappropriately in the
inspection. Circumstances such as, but not necessarily limited to,
inconsistencies between local code

[[Page 66539]]

requirements and the HUD physical inspection protocol; conditions which
are permitted by variance or license or which are preexisting physical
features non-conformities and are inconsistent with the HUD physical
condition protocol; or cases where the owner has been scored for
elements (e.g., roads, sidewalks, mail boxes, resident owned
appliances, etc.) that it does not own and is not responsible for
maintaining, may be addressed by a formal procedure to be initiated by
the owner's notification to the applicable HUD Field Office and
submission to that office of appropriate proof of the anomalous or
inappropriate application. This process may result in a reinspection
and/or rescoring of the inspection based on Office of Housing
recommendation after review and approval of the owner's submission of
appropriate proof of the anomalous or inappropriate application. An
owner may submit the request for this adjustment either prior to or
after the physical inspection has been concluded. HUD shall define, by
notice, the procedures to be followed to address circumstances
described in paragraph (e) of this section. The procedures outlined in
this Notice shall be binding on the REAC, the Office of Housing and the
DEC. The notice will be applicable to both public housing and
multifamily properties.
(f) Administrative review of properties. The files of any of the
multifamily housing properties may be submitted to HUD's Departmental
Enforcement Center (DEC) or to the appropriate HUD Multifamily Hub
Director (MFD) for evaluation, or both, at the discretion of the Office
of Housing.
(1) Notification to owner of submission of property file to the MFD
and DEC. The Department will provide for written notification to the
owner that the file on the owner's property is being submitted to the
MFD and/or the DEC for evaluation. The notification will be provided at
the time the REAC issues the physical inspection report to the owner or
at such other time as a referral occurs.
(2) 30-Day period for owner to provide the DEC with supporting and
relevant information and documentation. The owner has 30 calendar days,
from the date of the REAC written notification to the owner, to provide
comments, proposals, or any other information to the DEC which will
assist the MFD and DEC in conducting a comprehensive evaluation of the
property. A proposal provided by an owner may include the owner's plan
to correct deficiencies (corrective action plan). During the 30-day
response time available to the owner, the DEC may encourage the owner
to submit a corrective action plan. The corrective action plan, if
timely submitted during the 30-day period (whether on the owner's
initiative or at the request of the DEC), may serve as additional
information for the DEC to consider in determining appropriate action
to take at the conclusion of the evaluation period. If not submitted
during the 30-day response time, a corrective action plan may be
required of the owner at the conclusion of the DEC's evaluation of the
property.
(3) Evaluation of the property. During the evaluation period, the
DEC will perform an analysis of the multifamily housing property, which
may include input from tenants, HUD multifamily officials, elected
officials, and others as may be appropriate. Although the MFD will
assist with the evaluation, for insured mortgages, the DEC will have
primary responsibility for the conclusion of the evaluation of the
property after taking into consideration the input of interested
parties as described in this paragraph (f)(2). The DEC's evaluation may
include a site visit to the owner's property.
(4) Continuing responsibilities of HUD Multifamily Program Offices
and Mortgagee. During the period of DEC evaluation, HUD's multifamily
program offices continue to be responsible for routine asset management
tasks on properties and all servicing actions (e.g., rent increase
decisions, releases from reserve account approvals). In addition,
during this period of evaluation, the mortgagee shall continue to carry
out its duties and responsibilities with respect to the mortgage.
(g) Enforcement action. If, at the conclusion of the evaluation
period, the DEC determines that enforcement action is appropriate, the
DEC will provide written notification to the owner of the DEC's
decision to formally accept the property for enforcement purposes.
(1) DEC Owner Compliance Plan. (i) After notification to the owner
of the DEC's decision, the DEC will produce a proposed action plan (DEC
Compliance Plan), the purpose of which is to improve the physical
condition of the owner's property, and correct any other known
violations by the owner of its legal obligations. The DEC Compliance
Plan will describe:
(A) The actions that will be required of the owner to correct,
mitigate or eliminate identified property deficiencies, problems,
hazards, and/or correct any other known violations by the owner;
(B) The period of time within which these actions must be
completed; and
(C) The compliance responsibilities of the owner.
(ii) The DEC Compliance Plan will be submitted to the MFD for
review and concurrence. If the MFD does not concur, the DEC Compliance
Plan will be submitted to the Deputy Assistant Secretary for Housing
and the Deputy Director of the DEC for review and concurrence. If the
DEC Compliance Plan remains unapproved, a final decision on the plan
will be made by HUD's Deputy Secretary in consultation with the General
Counsel, the Assistant Secretary for Housing, and the Director of the
DEC.
(iii) Following submission of the DEC Compliance Plan to the owner,
the owner will be provided a period of 30 calendar days to review and
accept the DEC Compliance Plan. If the owner agrees to comply with the
DEC Compliance Plan, the plan will be forwarded to the appropriate
Multifamily Office for implementation and monitoring of completion of
the plan's requirements.
(2) Counter compliance plan proposal by owner. The owner may submit
an acceptable counter proposal to the DEC Compliance Plan. An owner's
counter proposal to a DEC Compliance Plan must be submitted no later
than the 30th day following submission of the DEC Compliance Plan to
the owner. The DEC, in coordination with the MFD, may enter into
discussions with the owner to achieve agreement to a revised DEC
Compliance Plan. If the owner and the DEC agree on a revised DEC
Compliance Plan, the revised plan will be forwarded to the appropriate
Multifamily Office for implementation and monitoring of completion of
the plan's requirements.
(3) Non-cooperation and Non-compliance by owner. If at the
conclusion of the 30th calendar day following submission of the DEC
Compliance Plan to the owner, the DEC receives no response from the
owner, or the owner refuses to accept the DEC Compliance Plan, or to
present a counter compliance plan proposal, or if the owner accepts the
DEC Compliance Plan or revised DEC Compliance Plan, but refuses to take
the actions required of the owner in the plan, the DEC may take
appropriate enforcement action.
(4) No limitation on existing enforcement authority. The
administrative process provided in this section does not prohibit the
Office of Housing, the DEC, or HUD generally, to take whatever action
may be necessary when necessary (notwithstanding the commencement of
this process), as authorized under existing statutes, regulations,
contracts or other

[[Page 66540]]

documents, to protect HUD's financial interests in multifamily
properties and to protect the residents of these properties.
(h) Limitations on material alteration of physical inspection
software. HUD will not materially alter the physical inspection
requirements in a manner which would materially increase the cost of
performing the inspection.

Dated: November 4, 1999.
William C. Apgar,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 99-30814 Filed 11-24-99; 8:45 am]
BILLING CODE 4210-27-P