[Federal Register Volume 80, Number 212 (Tuesday, November 3, 2015)]
[Rules and Regulations]
[Pages 67634-67635]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-28002]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 570

[Docket No. FR-5767-N-04]
RIN 2506-AC35


Section 108 Loan Guarantee Program: Announcement of Fee To Cover 
Credit Subsidy Costs

AGENCY: Office of the Assistant Secretary for Community Planning and 
Development, HUD.

ACTION: Announcement of fee.

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SUMMARY: This document announces the fee that HUD will collect from 
borrowers of loans guaranteed under the HUD's Section 108 Loan 
Guarantee Program (Section 108 Program) to offset the credit subsidy 
costs of the guaranteed loans pursuant to commitments awarded in FY 
2016, as authorized by the Continuing Appropriations Act, 2016. 
Elsewhere in today's Federal Register, HUD is publishing a final rule 
that amends its regulations to permit HUD to collect fees for Section 
108 guaranteed loans.

DATES: Effective Date: December 3, 2015.

FOR FURTHER INFORMATION CONTACT: Paul Webster, Director, Financial 
Management Division, Office of Block Grant Assistance, Office of 
Community Planning and Development, Department of Housing and Urban 
Development, 451 7th Street SW., Room 7180, Washington, DC 20410; 
telephone number 202-708-1871 (this is not a toll-free number). 
Individuals with speech or hearing impairments may access this number 
through TTY by calling the toll-free Federal Relay Service at 800-877-
8339. FAX inquiries (but not comments) may be sent to Mr. Webster at 
202-708-1798 (this is not a toll-free number).

SUPPLEMENTARY INFORMATION: 

I. Background

    Elsewhere in today's Federal Register, HUD is publishing a final 
rule that amends the Section 108 Program regulations to establish 
additional procedures when HUD is required or authorized to collect 
fees from Section 108 borrowers to offset the costs of the Section 108 
loan guarantee commitments. Following consideration of the public 
comments submitted in response to HUD's February 5, 2015 (80 FR 6469) 
notice that proposed the fee required to offset the credit subsidy 
costs to the Federal government to guarantee Section 108 loans, HUD has 
determined to set the fee for Section 108 loan disbursements under loan 
guarantee commitments awarded in FY 2016 at 2.58 percent of the 
principal amount of the loan. As discussed below, and as HUD discusses 
in its final rule published elsewhere in today's Federal Register, HUD 
determined to not to impose a fee with respect to FY 2015 loan 
guarantee commitments. The public is directed to HUD's final rule for a 
detailed discussion by HUD of the significant issues raised by the 
public comments submitted in response to HUD's February 5, 2015, notice 
and HUD's response to those comments.

II. FY 2016 Fee: 2.58 Percent of the Principal Amount of the Loan

    This document sets the fee for Section 108 loan disbursements under 
loan guarantee commitments awarded in FY 2016 at 2.58 percent of the 
principal amount of the loan. HUD will collect this fee from borrowers 
of loans guaranteed under the Section 108 Program to offset the credit 
subsidy costs of the guaranteed loans pursuant to commitments awarded 
in FY 2016, as authorized by the Continuing Appropriations Act, 2016 
(Pub. L. 114-53, approved September 30, 2015). The calculation of the 
FY 2016 fee, which was specified in the FY 2016 President's Budget,\1\ 
uses the same fee calculation model as the FY 2015 proposed fee 
included in HUD's February 5, 2015, notice, but incorporates updated 
information regarding the composition of the Section 108 portfolio and 
the timing of the estimated future cash flows for defaults and 
recoveries. The calculation of the fee is also affected by the discount 
rates required to be used by HUD when calculating the present value of 
the future cash flows as part of the Federal budget process.
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    \1\ The FY 2016 President's Budget for HUD is available at: 
https://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/hud.pdf. The fee is specified in table 6 of the Federal 
Credit Supplement to the 2016 budget and is available at: https://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/cr_supp.pdf.
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    As described in HUD's February 5, 2015, notice, HUD's credit 
subsidy calculation is based on the amount required to fully offset the 
credit subsidy cost to the Federal government associated with making a 
Section 108 loan guarantee. As a result, HUD's credit subsidy cost 
calculations incorporated assumptions based on: (i) Data on default 
frequency for municipal debt where such debt is comparable to loans in 
the Section 108 loan portfolio; (ii) data on recovery rates on 
collateral security for comparable municipal debt; (iii) the expected 
composition of the Section 108 portfolio by end users of the guaranteed 
loan funds (e.g., third party borrowers and public entities); and (iv)

[[Page 67635]]

other factors that HUD determines may be relevant to this calculation.
    Taking these factors into consideration, HUD determined that the 
fee for disbursements made under loan guarantee commitments awarded in 
FY 2016 is 2.58 percent, which will be applied only at the time of loan 
disbursements. Note that future notices may provide for a combination 
of up-front and periodic fees for loan guarantee commitments awarded in 
future fiscal years but will be subject to the public comment 
provisions of Sec.  570.712(b)(2) of the final rule.
    As HUD discusses in response to public comment on the amount of the 
fee, the expected cost of a Section 108 loan guarantee is difficult to 
estimate using historical program data because there have been no 
defaults in the history of the program that required HUD to invoke its 
full faith and credit guarantee or use the credit subsidy reserved each 
year for future losses.\2\ This is due to a variety of factors, 
including the availability of Community Development Block Grant (CDBG) 
funds as security. As authorized by Section 108 of the Housing and 
Community Development Act of 1974, as amended (42 U.S.C. 5308), 
borrowers may make payments on Section 108 loans using CDBG grant 
funds. Borrowers may also make Section 108 loan payments from other 
anticipated sources but continue to have CDBG funds available should 
they encounter shortfalls in the anticipated repayment source.
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    \2\ U.S. Department of Housing and Urban Development, Study of 
HUD's Section 108 Loan Guarantee Program, (prepared by Econometrica, 
Inc. and The Urban Institute), September 2012.
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    The fee of 2.58 percent of the principal amount of the loan will 
offset the expected cost to the government due to default, financing 
costs, and other relevant factors. To arrive at this measure, HUD 
analyzed data on comparable municipal debt over an extended 16 to 23 
year period. The estimated rate is based on the default and recovery 
rates for general purpose municipal debt and industrial development 
bonds. The cumulative default rates on industrial development bonds 
(14.62 percent) were higher than the default rates on general purpose 
municipal debt (0.25 percent) during the period from which the data 
were taken. (The recovery rates for industrial development bonds and 
general purpose debt were 74.76 and 90.27 percent, respectively.) These 
two subsectors of municipal debt were chosen because their purposes and 
loan terms most closely resemble those of Section 108 guaranteed loans. 
In this regard, Section 108 guaranteed loans can be broken down into 
two categories: (1) Loans that finance public infrastructure and 
activities to support subsidized housing (other than financing new 
construction) and (2) other development projects (e.g., retail, 
commercial, industrial). The 2.58 percent fee was derived by weighting 
the default and recovery data for general purpose municipal debt and 
the data for industrial development bonds according to the expected 
composition of the Section 108 portfolio by corresponding project type. 
Based on dollar amount of Section 108 loan guarantee commitments 
awarded during the period from FY 2010 through FY 2014, HUD expects 
that 25 percent of the Section 108 portfolio will be similar to general 
purpose municipal debt and 75 percent of the portfolio will be similar 
to industrial development bonds. In setting the fee at 2.58 percent of 
the principal amount of the guaranteed loan, HUD believes that the 
amount generated will fully offset the cost to the Federal government 
associated with making guarantee commitments awarded in FY 2016.

    Dated: October 26, 2015.
Harriet Tregoning,
Principal Deputy Assistant, Secretary for Community Planning and 
Development.
[FR Doc. 2015-28002 Filed 11-2-15; 8:45 am]
 BILLING CODE 4210-67-P