[Federal Register Volume 81, Number 188 (Wednesday, September 28, 2016)]
[Proposed Rules]
[Pages 66565-66576]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-23258]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 203 and 234

[Docket No. FR-5715-P-01]
RIN 2502-AJ30


Project Approval for Single-Family Condominiums

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement HUD's authority under the 
single-family mortgage insurance provisions of the National Housing Act 
to insure one-family units in a multifamily project, including a 
project in which the dwelling units are attached, or are manufactured 
housing units, semi-detached, or detached, and an undivided interest in 
the common areas and facilities which serve the project. The rule would 
codify requirements for Direct Endorsement lenders to meet in order to 
be approved for the Direct Endorsement Lender Review and Approval 
Process (DELRAP) authority for condominiums, and basic standards that 
projects must meet to be approved as condominiums in which individual 
units would be eligible for mortgage insurance, as well as particular 
cases such as Single-Unit Approvals and site condominiums. The rule 
provides a method by which certain approval standards could be varied 
efficiently to meet market needs while providing for public comment 
where appropriate. Currently, single-family condominium project 
approval is provided under HUD's Condominium Project Approval and 
Processing Guide and related Mortgagee Letters.
    Condominiums under this rule are distinct from condominiums in 
which the project has a blanket mortgage insured by HUD.

DATES: Comment due date: November 28, 2016.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Regulations Division, Office of General 
Counsel, Department of Housing and Urban Development, 451 7th Street 
SW., Room 10276, Washington, DC 20410-0500. Communications must refer 
to the above docket number and title. There are two methods for 
submitting public comments. All submissions must refer to the above 
docket number and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 7th Street SW., Room 10276, 
Washington, DC 20410-0500.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
www.regulations.gov. HUD strongly encourages commenters to submit 
comments electronically. Electronic submission of comments allows the 
commenter maximum time to prepare and submit a comment, ensures timely 
receipt by HUD, and enables HUD to make them immediately available to 
the public. Comments submitted electronically through the 
www.regulations.gov Web site can be viewed by other commenters and 
interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

    Note:  To receive consideration as public comments, comments 
must be submitted through one of the two methods specified above. 
Again, all submissions must refer to the docket number and title of 
the rule.

    No Facsimile Comments. Facsimile (fax) comments are not acceptable.
    Public Inspection of Public Comments. HUD will make all properly 
submitted comments and communications available for public inspection 
and copying between 8 a.m. and 5 p.m. weekdays at the above address. 
Due to security measures at the HUD Headquarters building, you must 
schedule an appointment in advance to review the public comments by 
calling the Regulations Division at 202-708-3055 (this is not a toll-
free number). Individuals with speech or hearing impairments may access 
this number via TTY by calling the toll-free Federal Relay Service at 
800-877-8339. Copies of all comments submitted are available for 
inspection and downloading at www.regulations.gov.

[[Page 66566]]


FOR FURTHER INFORMATION CONTACT: Elissa Saunders, Director, Office of 
Single Family Program Development, Office of Housing, Department of 
Housing and Urban Development, 451 7th Street SW., Washington, DC 
20410-8000; telephone number 202-708-2121 (this is not a toll-free 
number). Hearing- and speech-impaired persons may access this number 
through TTY by calling the Federal Relay Service at 800-877-8339 (this 
is a toll-free number).

SUPPLEMENTARY INFORMATION: 

I. Background

A. Prior Authority--Section 234 of the National Housing Act

    Prior to 2008, HUD's statutory authority to insure mortgages on 
condominium units came from section 234 of the National Housing Act (12 
U.S.C. 1715y) (the Act). Section 234 required that: The structure is or 
has been covered by a mortgage insured under another section of the 
Act; the mortgagor is acquiring or has acquired a family unit covered 
by a section 234 insured mortgage for his own use and occupancy; and 
the mortgagor will not own more than four one-family units covered by 
section 234 insured mortgages (Pub. L. 87-70, June 30, 1961, 75 Stat. 
161). Subsequent amendments allowed for a variety of project 
configurations in addition to vertical buildings (Pub. L. 97-35, August 
13, 1981, 95 Stat. 416); added an 80 percent mortgagor occupancy 
requirement; and removed the 4-unit limitation on ownership (Pub. L. 
98-181, November 30, 1983, 97 Stat. 1209).
    The Housing and Economic Recovery Act of 2008, Public Law 110-289, 
July 30, 2008 122 Stat. 2654 (HERA) was enacted July 30, 2008 and added 
a requirement to section 234(c) that the project have a blanket 
mortgage insured by the Secretary under section 234(d). HUD does not 
currently insure new mortgages on condominium units in projects with 
blanket mortgages. Although, there are existing mortgages that were 
previously insured under section 234, most condominium projects are not 
structured in this manner.

B. HERA of 2008 and Section 203 of the National Housing Act

    Section 2117 of Division B, Title I, Subtitle A of HERA, the FHA 
Modernization Act of 2008, amended the National Housing Act to provide 
authority for HUD to insure condominium units under the single-family 
program authorized by section 203 of the National Housing Act, 12 
U.S.C. 1709. Specifically, section 2117 amended the definition of 
``mortgage'' in section 201 of the Act (12 U.S.C. 1707), which 
definition also applies to section 203 of the Act (12 U.S.C. 1709), to 
include a mortgages on a one-family unit in a multifamily project, and 
an undivided interest in the common areas and facilities which serve 
the project. The HERA changes placed all authority for mortgage 
insurance of projects with blanket mortgages in section 234 of the Act, 
and units in other condominium projects under section 203 of the Act.

C. Current Regulations and Guidance

    Project approval for projects with FHA-insured blanket loans are 
governed according to the requirements of section 234 of the Act, 24 
CFR part 234, and other applicable policy guidance, including the 
Condominium Project Approval and Processing Guide (the Guide).

II. This Proposed Rule

    This proposed rule would codify basic regulatory requirements for 
condominium project approval, in addition to the current requirements 
under 24 CFR part 203. These requirements would be more flexible, less 
prescriptive, and more reflective of the current market than the 
requirements in the current section 234 program. The intent of this 
rule is to regulate where necessary to ensure financial soundness and 
project viability, but to be flexible where possible, and retain the 
ability to be responsive to the market.
    The rule proposes a new 24 CFR 203.8 that would codify DELRAP for 
condominiums. While a similar process is currently outlined in chapter 
1.2 of the Guide, this rule is proposing some changes based on HUD's 
experience. As now proposed, in order to participate in condominium 
project approval, a mortgagee would have to be granted DELRAP 
authority, and in order to be granted DELRAP authority, a mortgagee 
would have to be unconditionally approved for the Direct Endorsement 
program as provided in Sec.  203.3, and additionally have the following 
indicia of capability in underwriting condominium mortgages 
specifically: Staff with at least one year experience in underwriting 
mortgages on condominiums and/or condominium project approval; having 
originated not less than 10 condominium loans in HUD-approved projects; 
having an acceptable quality control plan that includes provisions 
specific to DELRAP; and ensuring that only staff members with the 
required experience participate in condominium project approval using 
DELRAP (proposed Sec.  203.8(b)).
    Under proposed Sec.  203.8(b)(2) and (b)(3), mortgagees would 
initially be granted conditional DELRAP authority upon providing a 
notice of their intent to participate in DELRAP. While conditionally 
approved, a mortgagee must submit all recommended Condominium Project 
approvals and denials to FHA for review, and may only proceed upon 
notification of HUD's agreement with the recommendation. Once the 
mortgagee has completed at least 5 DELRAP reviews to HUD's 
satisfaction, the mortgagee will be granted unconditional DELRAP 
authority and may approve condominium projects in accordance with HUD's 
requirements.
    Section 203.8(c) would provide for HUD's review of a DELRAP 
mortgagee's performance. HUD will monitor the performance on an ongoing 
basis, and, if there are no material deficiencies found, HUD will 
select a sample of project approvals, denials, or recertifications for 
post-action review. If the review shows deficiencies and the mortgagee 
has unconditional DELRAP authority, the mortgagee may be returned to 
conditional status. If additional reviews continue to show 
deficiencies, the mortgagee authority to participate in DELRAP may be 
terminated, or other action taken against the staff reviewer, under 
proposed Sec.  203.8(d), which includes any action available under 24 
CFR 203.3(d).
    Sections 203.8(d) and (e) provide for termination of DELRAP 
authority and requests for reinstatement of terminated authority. HUD 
may immediately terminate DELRAP authority or take actions under Sec.  
203.3(d) if the mortgagee violates any of the requirements and 
procedures established by the Secretary for mortgagees approved to 
participate in DELRAP, the Direct Endorsement program, or the Title II 
Single Family mortgage insurance program; or if other good cause 
exists; or for unacceptable performance. Actions under 24 CFR 203.3(d) 
include probation of Direct Endorsement lenders subject to conditions 
including additional training and changes to the mortgagee's quality 
control plan, or termination of Direct Endorsement approval. 
Termination of DELRAP authority would be effective upon the mortgagee's 
receipt of HUD's notice advising of the termination. Any termination of 
DELRAP authority is a separate action from an action for withdrawal of 
mortgagee approval by the Mortgagee Review Board, which could also be 
initiated by HUD.
    Under proposed Sec.  203.8(e), a mortgagee whose DELRAP authority 
is terminated under this section may request reinstatement if the 
mortgagee's

[[Page 66567]]

DELRAP authority has been terminated for at least 6 months. The request 
must address the eligibility criteria for participation in DELRAP under 
this rule as well as a corrective action plan, along with evidence that 
the mortgagee has implemented the corrective action plan. Following the 
request, HUD would be able to grant Conditional DELRAP authority if the 
mortgagee's application is complete and the Commissioner determines 
that the underlying causes for the termination have been satisfactorily 
remedied. The mortgagee would be required to complete successfully at 
least 5 test cases in accordance with Sec.  203.8(b)(3) in order to 
receive unconditional DELRAP authority.
    The rule proposes a minor change to current Sec.  203.17(a)(1), 
which section defines ``mortgage'' in accordance with section 201 of 
the National Housing Act (12 U.S.C. 1707), but has not been updated to 
account for the addition of mortgages on one-family units in 
multifamily projects and an undivided interest in the common areas and 
facilities. Nor does the current regulatory definition include detached 
and semi-attached units. By revising this section to cross-reference 
section 201 of the National Housing Act rather than attempting to 
summarize it, HUD avoids the need to update this definition each time 
the statutory definition is revised, and eliminates confusion that may 
be caused by differences between the statutory language and HUD's 
regulation.
    This rule proposes to revise currently reserved Sec.  203.43b to 
include the regulations pertaining to the eligibility of projects for 
approval and for condominium units in approved projects for mortgage 
insurance.
    Section 203.43b(a) would provide definitions of the terms 
Condominium Project, Condominium Unit, Rental for Transient or Hotel 
Purposes, Condominium Association, Single-Unit Approval, and Site 
Condominium under part 203. While Condominium Unit refers to a one-
family unit in a multifamily project, including a project in which the 
dwelling units are attached, or are manufactured housing units, semi-
detached, or detached, and an undivided interest in the common areas 
and facilities that serve the project, the term Condominium Project 
refers to the project as a whole in which such units are located. The 
term Rental for Transient or Hotel Purposes cross-references to section 
513(e) of the Act (12 U.S.C. 1731b(e)). Single-Unit Approval means 
approval of a loan on a single unit in a project that is not approved 
as a condominium. The term Site Condominium means a single family 
totally detached dwelling (which does not have a shared garage or any 
other attached building, including such improvements as archways, or 
breezeways), which is encumbered by a declaration of condominium 
covenants or condominium form of ownership, and which consists of the 
entire structure as well as the site and air space and is not 
considered to be a common area or limited common area.
    Section 203.43b(b) would state that a mortgage on a Condominium 
Unit shall be eligible for insurance under section 203 of the National 
Housing Act if it meets the requirements of 24 CFR part 203, subpart A, 
except as provided for in Sec.  203.43b. Section 203.43b(c) would 
further specify that the unit, to be eligible for insurance under Sec.  
203.43b, must be located in a Condominium Project approved by HUD or 
DELRAP mortgagee approved under 24 CFR 203.8, or meet the additional 
requirements for approval as a Site Condominium or Single-Unit 
Approval.
    Under this rule, HUD and DELRAP lenders will not approve proposed 
or under construction projects; however, HUD or DELRAP lenders may 
approve legal phases of projects or completed projects. The 
condominiums that may be approved under this rule would be those where 
the work on the project or legal phase, including buildings and 
infrastructure of the project or legal phase, is fully complete. HUD 
would expect that all the requirements of local law would be met, 
including review and approval of the project or legal phase by the 
local jurisdiction and recordation in the property records of the 
condominium plat or development plan, as applicable (see Sec. Sec.  
203.43b(d)(4) and (d)(5)).
    Section 203.43b(d) would state the basic condominium project 
approval eligibility requirements. The project or legal phase must be 
complete as to construction of the buildings and infrastructure. In 
addition, any legal phases must be contiguous (in a vertical building) 
or must consist of adjoining or contiguous homes (in a development of 
detached or semi-detached homes), and the units or buildings and 
infrastructure in each phase must be constructed and be complete. The 
project or legal phase must also be primarily residential in nature 
(although a certain amount of floor space may be set aside for 
commercial activities, as stated at Sec.  203.43b(d)(6)(vii)) and not 
intended for transient or hotel purposes; must consist solely of one-
family units, which is a statutory requirement under 12 U.S.C. 1707(a); 
and must be in full compliance with all Federal, State, and local laws 
with respect to zoning, Fair Housing, and accessibility for persons 
with disabilities, including but not limited to the Fair Housing Act, 
42 U.S.C. 3601 et seq., Section 504 of the Rehabilitation Act, 29 
U.S.C. 794, and the Americans with Disabilities Act, 42 U.S.C. 12101 et 
seq., where relevant. Infrastructure includes the project's streets, 
storm water management, water and sewage systems, and utilities, along 
with the project's common elements and amenities, such as parking lots, 
community buildings, swimming pools, golf courses, playgrounds, and any 
similar items, called for in the project or legal phase.
    In addition to these general requirements, condominiums must meet 
further approval requirements as provided by HUD. Some of these 
requirements are underwriting matters or existing legal requirements 
such as the nature of the real estate title or leasehold; unit owner 
control of the Condominium Association; insurance coverage; and 
statements regarding financial condition, special assessments, property 
conditions, and pending legal actions. These are the types of matters 
that HUD routinely considers when determining eligibility for FHA 
programs.
    In addition, the rule would implement some regulatory standards 
specific to condominiums, but seeks to do so in a way that is flexible 
and responsive to the market while continuing to involve the public in 
the rulemaking process. Section 203.43b(d)(6)(vii) would provide for 
HUD to set a standard for the maximum commercial/nonresidential space 
within a range from 25 percent to 60 percent of the total floor area. 
Mixed-use developments are a way to integrate housing, land-use, 
economic and workforce development, as well as transportation and 
infrastructure development. However, the agency believes that allowing 
greater than 50 percent commercial/nonresidential space may have a 
negative impact on the residential character of the project; therefore, 
HUD would not expect in the near future to allow greater than 50 
percent commercial/nonresidential space. HUD may want to allow less 
based on the experience it gains with this program.
    Under 12 U.S.C. 1709(y)(2),\1\ either HUD or the DELRAP lender, at 
the option of the requester, may grant an exception to the standard 
regarding the maximum percentage of commercial/

[[Page 66568]]

nonresidential space set by HUD. In determining whether to grant such 
an exception, factors relating to the economy for the locality in which 
the condominium project is located, or specific to the project, 
including the total number of family units in the project, shall be 
considered. A DELRAP lender, in determining whether to grant a 
requested exception, shall follow any procedures that HUD may 
establish.
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    \1\ As amended by the Housing Opportunity Through Modernization 
Act of 2016, Public Law 114-201 (approved July 29, 2016).
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    Within this range, in order to remain flexible and responsive to 
the market, HUD would be able to vary by notice the percentage of 
commercial/nonresidential space allowed or required. If HUD decides to 
vary the upper and lower limits of the range itself, the rule provides 
a procedure that includes notice and an opportunity for public comment. 
This notice and comment procedure is stated at Sec.  203.43b(e) of this 
proposed rule.
    Sections 203.43b(d)(6)(viii) and (d)(6)(ix) would treat acceptable 
maximum percentages of units with FHA-insured mortgages and acceptable 
minimum levels of owner occupancy, respectively, in a similar manner, 
with overall ranges between 25 and 75 percent, within which HUD would 
be able to vary the amount by notice. The owner occupancy percentage 
includes both principal and secondary residences (or units that have 
been sold to purchasers who intend to occupy them as primary or 
secondary residences). Secondary residences are defined at Sec.  
203.18(f)(2), mean dwellings (i) Where the mortgagor maintains or will 
maintain a part-time place of abode and typically spends (or will 
spend) less than a majority of the calendar year; (ii) which is not a 
vacation home; and (iii) which the Commissioner has determined to be 
eligible for insurance in order to avoid undue hardship to the 
mortgagor. A person may have only one secondary residence at a time.
    While having too few owner occupants can detract from the viability 
of a project, requiring too many can harm its marketability. HUD's 
current standard of 50 percent has worked in the recent market; 
however, HUD specifically invites comment on this issue. For these 
elements as well, the procedure to change the upper and lower limits of 
the range itself by notice with an opportunity to comment would apply.
    Section 203.43b(d)(6)(x) addresses phasing of a project. While HUD 
understands that developing projects in phases as funding is secured 
may be necessary in some cases, HUD is concerned about the risk of 
approving phases in cases where failure to complete a phase could 
result in the failure of the project as a whole. Therefore, only legal 
phasing will be allowed. All phases must be contiguous and constructed 
so that they are separately sustainable, meet the requirements of Sec.  
203.43b(d), and be capable of being occupied even if a subsequent phase 
were to be delayed or even fail to be completed.
    Section 203.43b(d)(6)(xi) addresses reserve accounts. Per HUD's 
usual practice, this rule would require that the reserve account is 
funded with at least 10 percent of the monthly unit assessments, unless 
a lower amount is deemed acceptable by HUD based on a reserve study 
completed not more than 24 months before a request for a lower amount 
is received.
    Section 203.43b(d)(6)(xii) permits HUD to set requirements 
regarding such other matters that may affect the viability or 
marketability of the project or its units. Additionally, under proposed 
Sec.  203.43b(f), the Secretary may grant case by case exceptions to 
the regulatory requirements under Sec.  203.43b(d)(6). This is in 
accordance with the discretionary nature of the Secretary's authority 
to insure mortgages under 12 U.S.C. 1709(a).
    Proposed 203.43b(g) provides the basic mechanism for condominium 
approval. Condominiums would be submitted to either HUD or a DELRAP 
lender, and, if all eligibility criteria are met, would be approved and 
placed on the list of HUD-approved condominium projects. Under Sec.  
203.43b(g)(3), unless otherwise specified in writing by HUD, approval 
would be for a period of 3 years from the date of placement on the 
approved list; HUD may rescind approval at any time if the project 
fails to comply with any requirement for approval.
    Proposed 203.43b(g)(4) provides for renewal of a project approval. 
The condominium could request renewal, by submitting a request for 
recertification no earlier than 6 months before, and no later than 6 
months after, expiration of the approval. As long as the request is 
timely, it may be supported by updating previously submitted 
information, rather than by resubmitting new information. However, if 
the request is not submitted by the end of 6 months after the 
expiration of approval, a complete, new approval application would be 
required. HUD will specify the format for the request.
    Proposed 203.43b(h) would provide overall parameters for Single-
Unit Approval, that is, approvals of individual units in projects that 
are not otherwise approved to participate. A mortgage secured by a 
Single-Unit Approval may be acceptable if the percentage of such 
mortgages insured in a project is within an amount determined by the 
Secretary to be necessary for the viability and marketability of the 
project, which percentage, within the range established in this rule, 
will be specified by HUD by notice. In addition, the unit may only be 
eligible for approval on a Single-Unit Approval basis if it is not 
located in a Condominium Project that is approved under this section or 
has been subject to a negative determination for significant issues 
that affect the viability of the project. The project must be complete 
(i.e., not proposed, under construction, or subject to further phasing 
or annexation), including all common elements and those of the master 
association. The project must have a percentage of units sold within a 
range stated in the rule, with the specific percentage to be 
established by HUD through notice. Finally, the Single-Unit Approval 
must be in a project in which no single entity owns more than the 
percentage of units in the project that is within the range stated in 
rule, with the specific percentage to be established by HUD through 
notice. If HUD determines it is necessary to change the upper and lower 
limits of the ranges, it will issue a notice for comment.
    Proposed Sec.  203.43b(i) would govern site condominiums. Insurance 
and maintenance costs must be the sole responsibility of the owner, and 
any common assessments collected must be restricted to use solely for 
amenities outside of the footprint of the individual site.
    Condominium units that meet the statutory requirements of section 
203(k) of the Act, 12 U.S.C. 1709(k), are eligible for rehabilitation 
loans. Section 203(k) and the implementing HUD regulation at 24 CFR 
203.50(a)(1)(i) provides for rehabilitation loans for 1-4 unit 
structures that are primarily residential. A rehabilitation loan for an 
individual condominium unit under 203(k) necessarily excludes the 
building exterior and common elements, which are the responsibility of 
the Association, so that the 203(k) loan would be for the portion of 
the structure that is inside the unit including the installation of 
firewalls in the attic of a unit (proposed 24 CFR 203.50(a)(1)(iv)).
    In accordance with HUD's longstanding policy for 203(k) 
rehabilitation loans secured by condominium units, this proposed rule 
would add a provision stating that the maximum loan amount is 100 
percent of the after-improvement value of the unit for any Condominium 
Unit. (proposed 24 CFR 203.50(f)(3)).

[[Page 66569]]

    Finally, the proposed rule would address the continued 
applicability of 24 CFR part 234, which now applies, along with section 
234 of the Act (12 U.S.C. 1715y) and other HUD issuances specific to 
part 234, only in cases where projects have blanket mortgages insured 
by HUD. This proposed rule adds a new Sec.  234.2, entitled ``Savings 
clause,'' which clarifies that part 203 and this section apply in all 
cases except where the project has a blanket mortgage insured under 
section 234(d) of the Act, in which case section 234 of the Act, 24 CFR 
part 234, and other HUD issuances (including HUD Handbook 4265.1, Home 
Mortgage Insurance Condominiums; Chapter 11 of HUD Handbook 4150.1, 
Valuation Analysis for Home Mortgage Insurance and any Mortgagee 
Letters that discuss section 234 requirements) apply.
Requests for Public Comment
    (1) HUD seeks public comment specifically on the proposed 
requirement in Sec.  203.43b(d)(4) that the project or legal phase be 
``complete and ready for occupancy, including completion of the 
infrastructure of the project or legal phase, and not subject to 
further rehabilitation, construction, phasing, or annexation, except to 
the extent that approval is sought for legal phasing in compliance with 
the requirements of paragraph (d)(6)(x) of this section.'' Given that 
HUD approval of a fully completed project would not require an 
environmental review, while continuing the current practice of 
approving proposed or under construction projects could require 
environmental review, HUD seeks comments on how this rule would affect 
industry participation in the program.
    (2) HUD seeks public comment specifically on whether there is some 
other indicia of appropriate experience that could be used rather than, 
or in addition to, experience in underwriting condominium mortgages 
and/or condominium approval, or the number of loans originated; for 
instance, is there another type of experience that could provide an 
indication of competency in condominium project approval, and how would 
it provide such indication?
    (3) HUD seeks public comment specifically on the ranges this rule 
proposes to establish, within which HUD may set the specific 
requirements for percentages of Single-Unit Approvals, commercial 
space, FHA insured units, and owner-occupied units. HUD seeks comment 
on whether this range approach is the best approach, and whether the 
ranges proposed are appropriate. The agency would be interested in any 
data or evidence that could be provided either that the ranges, as 
proposed, are appropriate, or that a different set of ranges would be 
more appropriate or would yield additional benefits.
    (4) HUD seeks public comment specifically on the proposed revision 
of the period of project approval from 2 to 3 years, including whether 
there are any costs and benefits that would be associated with a 
shorter or longer timeframe.

III. Findings and Certifications

Paperwork Reduction Act
    The information collection requirements contained in this rule have 
been submitted to the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). In accordance 
with the Paperwork Reduction Act, an agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
unless the collection displays a currently valid OMB control number.
    The burden of the information collections in this rule is estimated 
as follows:

----------------------------------------------------------------------------------------------------------------
                                     Number of     Frequency of    Total annual      Hours per     Total burden
     Information collection         respondents      response        responses       response          hours
----------------------------------------------------------------------------------------------------------------
Package Preparation.............          15,000               1          15,000               2          30,000
Package Review..................          15,000               1          15,000               1          15,000
Quality Assurance...............          15,000              .2           3,000               1           3,000
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    Totals......................          45,000             2.2          33,000               4          48,000
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    In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments 
from members of the public and affected agencies concerning this 
collection of information to:
    (1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
    (2) Evaluate the accuracy of the agency's estimate of the burden of 
the proposed collection of information;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (4) Minimize the burden of the collection of information on those 
who are to respond, including through the use of appropriate automated 
collection techniques or other forms of information technology, e.g., 
permitting electronic submission of responses.
    Interested persons are invited to submit comments regarding the 
information collection requirements in this rule. Comments must refer 
to the proposal by name and docket number (FR-5563) and must be sent 
to:

HUD Desk Officer, Office of Management and Budget, New Executive Office 
Building, Washington, DC 20503, Fax: (202) 395-6947;
and
Reports Liaison Officer, Office of Public and Indian Housing, 
Department of Housing and Urban Development, Room, 451 7th Street SW., 
Washington, DC 20410.

Interested persons may submit comments regarding the information 
collection requirements electronically through the Federal eRulemaking 
Portal at http://www.regulations.gov. HUD strongly encourages 
commenters to submit comments electronically. Electronic submission of 
comments allows the commenter maximum time to prepare and submit a 
comment, ensures timely receipt by HUD, and enables HUD to make them 
immediately available to the public. Comments submitted electronically 
through the http://www.regulations.gov Web site can be viewed by other 
commenters and interested members of the public. Commenters should 
follow the instructions provided on that site to submit comments 
electronically.
Regulatory Planning and Review
    OMB reviewed this proposed rule under Executive Order 12866 
(entitled ``Regulatory Planning and Review''). This rule was determined 
to be a ``significant regulatory action,'' as defined in 3(f) of the 
order (although not an economically significant regulatory action, as 
provided under section 3(f)(1)

[[Page 66570]]

of the order). The docket file is available for public inspection 
between the hours of 8 a.m. and 5 p.m. weekdays in the Regulations 
Division, Office of General Counsel, Department of Housing and Urban 
Development, 451 7th Street SW., Room 10276, Washington, DC 20410-0500.
    The proposed rule establishes regulations concerning three aspects 
of the Direct Endorsement Lender Review and Approval Process (DELRAP) 
for single family condominiums. First, the rule establishes parameters 
regarding which kind of condominium projects are eligible for approval 
for the purpose of single unit mortgage insurance through the 
Department of Housing and Urban Development. Flexible approval standard 
requirements, will allow for projects to efficiently meet market needs. 
Second, the rule changes the frequency with which approved projects 
need to be reapproved from two years to three years. Third, the rule 
changes the standards for condominium DELRAP mortgagees in order to 
require minimum experience and quality control levels.
    The rule could result in multiple transfers: Among lenders, among 
condominium projects; and to FHA. The benefit of the proposed rule is 
to provide flexibility in implementation providing competent lenders a 
role in project approval. Costs arise from any administrative burden 
imposed upon the private sector or lost opportunities resulting from 
condominium project requirements. Many provisions of the rule (Single-
Unit Approval, flexible standards, a longer interval for condo 
approvals, and exceptions for environmental review) will reduce or 
eliminate the compliance costs of the rule. The Regulatory Impact 
Analysis discusses but does not monetize many of the difficult to 
evaluate impacts. Monetized annual impacts of the rule include the 
estimated paperwork burden of $2.1 million. HUD finds that increasing 
the periodicity of approval from 2 to 3 years reduces the costs of 
approval by $1 million annually.
    Greater detail and analysis than this brief summary can provide is 
available in the full initial Regulatory Impact Analysis (RIA) prepared 
for this rule, which is available for public inspection in the 
Regulations Division and may be viewed online at www.regulations.gov, 
under the docket number above. Due to security measures at the HUD 
Headquarters building, an advance appointment to review the public 
comments must be scheduled by calling the Regulations Division at (202) 
708-3055 (this is not a toll-free number). Individuals with speech or 
hearing impairments may access this number via TTY by calling the 
Federal Relay Service at (800) 877-8339.
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 rule does not impose 
any Federal mandate on any state, local, or tribal government or the 
private sector within the meaning of UMRA.
Environmental Review
    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. 4332(2)(C)). The Finding is available for public 
inspection during regular business hours in the Regulations Division, 
Office of General Counsel, Department of Housing and Urban Development, 
451 7th Street SW., Room 10276, Washington, DC 20410-0500. Due to 
security measures at the HUD Headquarters building, please schedule an 
appointment to review the Finding by calling the Regulations Division 
at (202) 402-3055 (this is not a toll-free number). Individuals with 
speech or hearing impairments may access this number via TTY by calling 
the Federal Relay Service at (800) 877-8339.
Regulatory Flexibility Act
    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.), 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements, unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
This proposed rule establishes regulations for single-family mortgage 
insurance of condominium units pursuant to 12 U.S.C. 1707 and 1709. 
However, HUD has been providing mortgage insurance for this purpose 
pursuant to statute and the Condominium Approval and Processing Guide 
published in 2011. While this rule makes some adjustments to the 
provisions on eligibility for DELRAP participation, and many DELRAP 
lenders are small entities, this rule is not so different as to create 
a significant economic impact.

A. Industry Sector Data Analysis

    Industries involved in mortgage origination and lending. Mortgage 
originators (reverse, purchase, refinance) include both brokers and 
lenders. The firms that participate in lending are divided among five 
primary groups: Banks, thrifts, mortgage banks, credit unions, and 
mortgage brokers. A precise description of these individual industries 
is as follows:
Commercial Banking (NAICS 522110)
    Entities primarily engaged in accepting demand and other deposits 
and making commercial, industrial, and consumer loans. Commercial banks 
and branches of foreign banks are included.
Savings Institutions (NAICS 522120)
    Entities primarily engaged in accepting time deposits, making 
mortgage and real estate loans, and investing in high-grade securities. 
Savings and loan associations and savings banks are included in this 
industry.
Credit Unions (NAICS 522130)
    Entities primarily engaged in accepting members' share deposits in 
cooperatives that are organized to offer consumer loans to their 
members.
Real Estate Credit (NAICS 522292)
    Entities primarily engaged in lending funds with real estate as 
collateral. This includes: Construction lending, farm mortgage lending, 
Federal Land Banks, home equity credit lending, loan correspondents 
(i.e., lending funds with real estate as collateral), mortgage banking 
(i.e., nondepository mortgage lending), and mortgage companies.
Mortgage and Nonmortgage Loan Brokers (NAICS 522310)
    Entities primarily engaged in arranging loans by bringing borrowers 
and lenders together on a commission or fee basis.
    During the 1980s and 1990s, mortgage lending evolved from the 
traditional portfolio lender model where single companies (bank and 
thrift depositories) performed all steps in the mortgage process--
making, closing, funding, servicing, and holding the loan--to a more 
specialized industry of originators, funding lenders, warehouse 
lenders, separate secondary market buyers of loans, and servicers.\2\ A 
major driving force behind the unbundling of the mortgage functions, as 
well as the rise of mortgage brokers, has been the rise and eventual 
dominance of mortgage securitization, which separated the provision of 
capital from loan origination and servicing. Brokers

[[Page 66571]]

originate loans mainly for wholesale lenders.
---------------------------------------------------------------------------

    \2\ Michael G. Jacobides, ``Mortgage Banking Unbundling: 
Structure, Automation, and Profit,'' Mortgage Banking, January 2001, 
pages 28-40.
---------------------------------------------------------------------------

    Studies of the mortgage brokerage industry do not find there to be 
high fixed costs for firms. There is little evidence of economies of 
scale in mortgage origination but there is some evidence that brokers 
are more efficient originators than mid-size and large lenders. Olson 
(2002) reports that his surveys find no economies of scale in mortgage 
production--a one-person firm produced as many loans per employee as a 
larger firm. Olson regards brokers as low-cost, highly-competitive 
firms, vigorously competing with one another and with little 
opportunity to earn above-normal profits.\3\
---------------------------------------------------------------------------

    \3\ Olson, David. 2002. ``Report of David Olson.'' Report 
submitted to U.S. District Court, Court of Minnesota in Civil Case 
No. 97-2068 DWF/SRN: Lonnie and Danny Glover (Plantiffs) vs. 
Standard Federal Bank, ABN AMRO Mortgage Group, Inc. and Heartland 
Mortgage Corporation (Defendants).
---------------------------------------------------------------------------

B. Current State of the Market

    In 2014, 7,062 institutions reported data on nearly 10 million home 
mortgage applications, resulted in 6 million originations. This is down 
from 8.7 million originations in 2013. There was an historically high 
share of loans originated outside the federally insured banking system 
by institutions such as independent mortgage companies and credit 
unions, not subject to Community Reinvestment Act (Federal Reserve, 
2015).\4\
---------------------------------------------------------------------------

    \4\ http://www.federalreserve.gov/pubs/bulletin/2015/pdf/2014_HMDA.pdf.
---------------------------------------------------------------------------

    The share of mortgages originated by non-depository, independent 
mortgage companies has increased sharply in recent years. Small banks 
and credit unions have also increased market shares over the past 
decade. The fraction of originations attributable to large banks and 
their nonbank subsidiaries diminished. Banks and thrifts accounted for 
45 percent of all reported mortgage originations; independent mortgage 
companies 40 percent, credit unions over 9 percent, affiliates, 
remainder (Federal Reserve, 2015).
    In 2014, 7,062 reporting institutions, 4,118 banks and thrifts, 
3,367 were small (assets less than $1 billion), 1,984 credit unions, 
139 mortgage companies affiliated with depositories (banks and credit 
unions), 821 independent mortgage companies. In 2014, small banks and 
credit unions were much more likely to originate conventional higher-
priced loans than large banks and mortgage companies. Small banks and 
credit unions originated about 18 percent of conventional home-purchase 
loans, but accounted for 59 percent of higher-priced conventional home-
purchase loans (Federal Reserve, 2015).

C. Size Standards

    SBA's size standards (2016) define whether a business entity is 
small and, thus, eligible for Government programs and preferences 
reserved for ``small business'' concerns. Size standards have been 
established for types of economic activity, or industry, generally 
under the North American Industry Classification System (NAICS). For 
most industries considered, a ``small'' business is defined by revenue. 
Size standards are based on another criterion if revenue is not 
suitable, either because prices are volatile or there are more 
appropriate measures.
    According to the U.S. Census Bureau, revenue for Finance, Insurance 
and Real Estate includes commissions and fees from all sources, rents, 
net investment income, interest, dividends, royalties, and net 
insurance premiums earned. SBA considers a real estate credit small if 
its annual revenue is no greater than $38.5 million. A mortgage broker 
is defined as small if its revenue is no greater than $7.5 million.
    For three of the industries considered in this analysis (Commercial 
Banks, Savings Institutions, and Credit Unions), the SBA definition of 
small is by the dollar amount of assets ($550 million). Assets include: 
Cash, interest-earning loans, leases, securities, real estate, letters 
of credit, loans to other banks, any other financial assets, and 
intangible assets.
    The diversity of size standards makes it difficult to perform a 
precise analysis of the ubiquity small firms. This difficulty is 
compounded when sources of business statistics do not report their data 
by SBA's size standards and that industry definition may not be 
equivalent. When an exact correspondence is not possible, HUD will, by 
necessity, use an alternative size standard. For example, asset data is 
collected by the Federal Deposit Insurance Corporation (FDIC) for 
Commercial Banks and Savings Institutions. FDIC uses $1 billion as a 
means to categorize banks and thrifts, which is more inclusive than 
SBA's definition.

D. Prevalence of Small Firms

    Estimating the prevalence of small firms in making FHA-insured 
condominium loans requires combining statistics from different sources.

                                 FHA Insured Condominium Loans by Lender Type *
----------------------------------------------------------------------------------------------------------------
                                                                   Forward condo     All condo
                                                    Firms (% of     loans (% of    loans *** (%      All condo
                 Type of lender                       number)        number of     of number of     loans (% of
                                                                      loans)          loans)      dollar volume)
----------------------------------------------------------------------------------------------------------------
Bank (Total)....................................              30              20              19               7
    Small Bank **...............................              13               3               3               1
    Large Bank..................................              17              17              16               6
Mortgage Company................................              66              79              79              93
    Affiliated..................................               1               0               0               0
    Independent.................................              65              79              79              93
Credit Union....................................               3               1               1               0
                                                 ---------------------------------------------------------------
        Total ****..............................             100             100             100             100
----------------------------------------------------------------------------------------------------------------
* Source: Single Family Data Warehouse 6/1/14-5/31/16.
** Defined as having assets no greater than $1 Billion.
*** All = forward + HECM.
**** Percentages by lender type are rounded and so may not sum to 100.

    The table provides us with some insight concerning the types of 
firms that are involved in making FHA-condo loans. The predominant 
originators by any measure are mortgage companies. Independent mortgage 
companies make

[[Page 66572]]

79 percent of the loans and 93 percent of the dollar volume. The 
largest independent mortgage company, Quicken Loans, accounts for over 
5.5 percent of all condo loans. In this table, ``banks'' are equivalent 
to commercial banks and savings institutions. Small banks (assets of no 
greater than $1 billion) represent a small proportion of firms (13 
percent) and an even smaller percentage of condo loans (3 percent).
    Given the dominance of mortgage companies, an estimate of the small 
companies originating mortgage loans is essential to a good economic 
analysis. HUD has data concerning the total FHA-insured loans made by 
the firms also involved in the condo business. An estimate of the total 
loans can be arrived at by dividing FHA loans by FHA's market share. 
Doing so will lead to estimates that are inaccurately high for some and 
too low for others. On average the estimate will be correct. In the 
last three years (2013-2015), FHA's share of the dollar value of home 
purchases as varied around 15 percent.
    The estimated value of loans can be converted to an estimated 
revenue by multiplying by an appropriate percentage. Estimates of 
broker income vary between 1 and 3 percent. We use the lower to arrive 
for a more expansive count of small business. Of all condo lenders, 31 
percent of the firms are small mortgage companies (earning less than 
$7.5 million). These small mortgage companies make 5 percent of all 
condo loans and 2 percent of the dollar volume.
    We counted a total of only 39 credit unions over a two-year period. 
Credit Unions are not active in making condo loans. The proportion of 
loans and dollar value made by credit unions is very close to 0 
percent. Thus, accuracy in estimating the small/large percentage is not 
as important as for other types of lenders. We will assume that all 
credit unions are small because the average asset amount is 
significantly below $1 billion (Monthly Credit Union Estimates, May 
2016).
    Small firms constitute 47 percent of originators of FHA-insured 
condo loans, 9 percent of all condo loans, and 3 percent of the dollar 
volume.

                 Estimates of Prevalence of Small Loan Originators Involved in FHA Condo Lending
----------------------------------------------------------------------------------------------------------------
                                                                                     Number of     Dollar volume
                                                                    Small firms     condo loans   of condo loans
                                                                        (%)             (%)             (%)
----------------------------------------------------------------------------------------------------------------
Banks...........................................................              13               3               1
Mortgage Companies..............................................              31               5               2
Credit Unions...................................................               3               1               0
                                                                 -----------------------------------------------
    Total.......................................................              47               9               3
----------------------------------------------------------------------------------------------------------------

E. Economic Impact

    Approximately half of the firms engaged in making FHA-insured 
condominium loans are estimated to be small. This share of small firms 
could change depending upon the regulatory impact of the rule and 
whether that impact is disproportionate. Although small business 
constitutes 47 percent of all firms, they originate only 9 percent of 
all loans, making it more difficult to pass on any costs of origination 
to borrowers. Reducing (raising) fixed costs benefits (harms) small 
firms disproportionately more than large ones.
    One aspect of the rule that could have a negative and 
disproportionate impact on small firms are any requirements to 
participate in the DELRAP program. While many of the requirements will 
be met with little difficulty by already-approved lenders, requirements 
that are related to the level of business activity would place a 
relatively higher burden on small firms. To be qualified for Direct 
Endorsement authority, a mortgagee must satisfy the following 
characteristics: Possess at least one of year experience in condo 
loans; have made at least 10 FHA approved condo loans; possess a 
quality control plan; and participating staff is limited to those with 
prior experience. All of these requirements would be easier to meet by 
larger firms with greater capacity. Nonetheless, small firms that have 
at least occasional experience should be able to satisfy the 
requirements without undue burden.
    Other elements of the rule lift regulatory burdens. First, allowing 
Single-Unit Approval enables small lenders business opportunities 
without the cost of seeking approval for an entire condominium 
project.\5\ Second, by providing that only completed projects may be 
approved, this rule eliminates the need for HUD to require an 
environmental review from lenders as a condition of approval. This 
change will benefit small firms that are less likely to retain 
specialists. Although some components of the rule raise the cost of 
compliance for small firms, other elements will expand their 
opportunities and allow them to spread the compliance costs over a 
greater number of loans. Also, participation in condominium insurance, 
like HUD's other mortgage insurance programs, is purely voluntary.
---------------------------------------------------------------------------

    \5\ As noted in the accompanying Regulatory Impact Analysis, the 
average cost of a project DELRAP approval would be $1,250. Extending 
the approval period to 3 years reduces this cost by approximately 
one-third for all lenders.
---------------------------------------------------------------------------

    Therefore, the undersigned certifies that this rule will not have a 
significant impact on a substantial number of small entities.
    Notwithstanding HUD's view that this rule will not have a 
significant effect on a substantial number of small entities, HUD 
specifically invites comments regarding any less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in this preamble.
Executive Order 13132, 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.
Catalog of Federal Domestic Assistance Number
    The Catalog of Federal Domestic Assistance number for 24 CFR parts 
203 and 234 is 14.117.

List of Subjects

24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians-lands, Loan

[[Page 66573]]

programs-housing and community development, Mortgage insurance, 
Reporting and recordkeeping requirements, Solar energy.

24 CFR Part 234

    Condominiums, Mortgage insurance, Reporting and recordkeeping 
requirements.

    For the reasons stated in the foregoing preamble, HUD proposes to 
amend 24 CFR parts 203 and 234 as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

0
1. The authority citation for part 203 is revised to read as follows:

    Authority: 12 U.S.C. 1707, 1709, 1710, 1715b, 1715z-16, 1715u, 
and 1715z-21; 15 U.S.C. 1639c; 42 U.S.C. 3535(d).

Subpart A--Eligibility Requirements and Underwriting Procedures

0
2. Add Sec.  203.8 to read as follows:


Sec.  203.8  Approval of mortgagees for Direct Endorsement Lender 
Review and Approval Process (DELRAP).

    (a) General. Each mortgagee that chooses to participate in the 
review and approval of Condominium Projects, as set forth in Sec.  
203.43b, must be granted authority to participate in the Direct 
Endorsement Lender Review and Approval Process (DELRAP).
    (b) DELRAP Authority--(1) Eligibility. To be granted DELRAP 
authority, as described in Sec.  203.43b, a mortgagee must be 
unconditionally approved for the Direct Endorsement program as provided 
in Sec.  203.3 and meet the following requirements:
    (i) Have staff with at least one year of experience in underwriting 
mortgages on condominiums and/or condominium project approval;
    (ii) Have originated not less than 10 condominium loans in projects 
approved by the Commissioner;
    (iii) Have an acceptable quality control plan that includes 
specific provisions related to DELRAP; and
    (iv) Ensure that only staff members meeting the above experience 
requirements participate in the approval of a Condominium Project using 
DELRAP authority.
    (2) Conditional DELRAP Authority. Mortgagees will be granted 
Conditional DELRAP authority upon provision of notice to the 
Commissioner of the intent to use DELRAP. Mortgagees with Conditional 
DELRAP authority must submit all recommended Condominium Project 
approvals, denials and recertifications to FHA for review. If FHA 
agrees with the mortgagee's recommendation, it will advise the 
mortgagee that it may proceed with the recommended decision on the 
Condominium Project.
    (3) Unconditional DELRAP Authority. Mortgagees will be granted 
unconditional DELRAP authority after completing at least five (5) 
DELRAP reviews to the satisfaction of the Commissioner and may then 
exercise DELRAP authority to approve projects in accordance with 
requirements of the Commissioner.
    (c) Reviews. HUD will monitor a mortgagee's performance in DELRAP 
on an ongoing basis.
    (1) If the review shows that there are no material deficiencies, 
subsequent project approvals, denials or recertifications may be 
selected for post-action review based on a percentage as determined by 
the Commissioner.
    (2) If the review shows that there are deficiencies in the 
mortgagee's DELRAP performance, the mortgagee may be returned to 
Conditional DELRAP status.
    (3) If additional reviews continue to show deficiencies in the 
mortgagee's DELRAP performance, the mortgagee's authority to 
participate in DELRAP may be terminated or other action taken against 
the mortgagee or responsible staff reviewer.
    (d) Termination of DELRAP Authority. (1) HUD may immediately 
terminate the mortgagee's authority to participate in DELRAP or take 
any action listed in 24 CFR 203.3(d) if the mortgagee:
    (i) Violates any of the requirements and procedures established by 
the Secretary for mortgagees approved to participate in DELRAP, the 
Direct Endorsement program, or the Title II Single Family mortgage 
insurance program; or
    (ii) If HUD determines that other good cause exists.
    (2) Such termination will be effective upon receipt of HUD's notice 
advising of the termination.
    (3) Notwithstanding any provisions of this section, the 
Commissioner reserves the right to take administrative action, 
including revocation of DELRAP authority, against any mortgagee and 
staff reviewer because of unacceptable performance. Any termination 
instituted under this section is distinct from withdrawal of mortgagee 
approval by the Mortgagee Review Board under 24 CFR part 25.
    (e) Reinstatement. A mortgagee whose DELRAP authority is terminated 
under this section may request reinstatement if the mortgagee's DELRAP 
authority has been terminated for at least 6 months. In addition to 
addressing the eligibility criteria specified in paragraph (b)(1) of 
this section, the application for reinstatement must be accompanied by 
a corrective action plan addressing the issues that led to the 
termination of the mortgagee's DELRAP authority, along with evidence 
that the mortgagee has implemented the corrective action plan. The 
Commissioner may grant Conditional DELRAP authority if the mortgagee's 
application is complete and the Commissioner determines that the 
underlying causes for the termination have been satisfactorily 
remedied. The mortgagee will be required to complete successfully at 
least five (5) test cases in accordance with paragraph (b)(2) in order 
to receive unconditional DELRAP authority as provided in paragraph 
(b)(3) above.
0
3. Revise Sec.  203.17(a)(1) to read as follows:


Sec.  203.17  Mortgage provisions.

    (a) Mortgage form. (1) The term ``mortgage'' as used in this part, 
except Sec.  203.43c, shall have the meaning given in Section 201 of 
the National Housing Act, as amended (12 U.S.C. 1707).
* * * * *
0
4. Add 203.43b to read as follows:


Sec.  203.43b  Eligibility of mortgages on single-family condominium 
units.

    (a) Definitions. As used in this part:
    (1) Condominium Association (Association) means the organization, 
regardless of its formal legal name that consists of homeowners within 
a condominium project for the purpose of managing the financial and 
common-area assets.
    (2) Condominium Project shall mean the project in which one-family 
dwelling units are attached, semi-detached, or detached, or are 
manufactured housing units, and in which owners hold an undivided 
interest in the common areas and facilities that serve the project.
    (3) Condominium Unit shall mean real estate consisting of a one-
family unit in a multifamily project, including a project in which the 
dwelling units are attached, or are manufactured housing units, semi-
detached, or detached, and an undivided interest in the common areas 
and facilities that serve the project.
    (4) Infrastructure means the condominium project's streets, storm 
water management, water and sewage systems, and utilities, along with 
the project's common elements and amenities, such as parking lots, 
community buildings, swimming pools, golf courses, playgrounds, and any 
similar items, called for in the project or legal phase.
    (5) Rental for Transient or Hotel Purposes shall have the meaning 
given

[[Page 66574]]

in section 513(e) of the National Housing Act (12 U.S.C. 1731b(e)).
    (6) Single-Unit Approval means approval of one unit in an 
unapproved condominium project under paragraph (h) of this section.
    (7) Site Condominium means a single family detached dwelling (which 
does not have a shared garage or any other attached building, including 
such improvements as archways, or breezeways), which is encumbered by a 
declaration of condominium covenants or condominium form of ownership, 
and which consists of the entire structure as well as the site and air 
space and is not considered to be a common area or limited common area.
    (b) Eligibility. A mortgage secured by a Condominium Unit shall be 
eligible for insurance under section 203 of the National Housing Act if 
it meets the requirements of this subpart, except as modified by this 
section.
    (c) Approval required. To be eligible for insurance under this 
section, a Condominium Unit must be located in a Condominium Project 
approved by HUD or a DELRAP mortgagee approved under Sec.  203.8, or 
meet the additional requirements for approval as a Site Condominium or 
Single-Unit Approval.
    (d) Condominium Project Approval: Eligibility Requirements. To be 
eligible for Condominium Project approval, the Condominium Project 
must:
    (1) Be primarily residential in nature and not be intended for 
rental for Transient or Hotel Purposes;
    (2) Consist of units that are solely one-family units;
    (3) Be in full compliance with all applicable Federal, State, and 
local laws with respect to zoning, Fair Housing, and accessibility for 
persons with disabilities, including but not limited to the Fair 
Housing Act, 42 U.S.C. 3601 et seq., Section 504 of the Rehabilitation 
Act, 29 U.S.C. 794, and the Americans with Disabilities Act, 42 U.S.C. 
12101 et seq., where relevant;
    (4) Be complete and ready for occupancy, including completion of 
all the infrastructure of the project or legal phase, and not subject 
to further rehabilitation, construction, phasing, or annexation, except 
to the extent that approval is sought for legal phasing in compliance 
with the requirements of paragraph (d)(6)(x) of this section;
    (5) Be reviewed and approved by the local jurisdiction with respect 
to the condominium plat or similar development plan and any phases; if 
applicable, the approved plat or development plan must have been 
recorded in the land records of the jurisdiction; and
    (6) Meet such further approval requirements as provided by the 
Commissioner through notices with respect to:
    (i) Nature of title to realty or leasehold interests;
    (ii) Control over, and organization of, the Condominium 
Association;
    (iii) Minimum insurance coverage for the Condominium Project;
    (iv) Planned or actual special assessments;
    (v) Financial condition of the Condominium Project;
    (vi) Existence of any pending legal action, or physical property 
condition;
    (vii) Commercial/non-residential space, which must be within a 
range between 25 and 60 percent of the total floor area (which range 
may be changed following the procedures in paragraph (d)(6) of this 
section), with the specific maximum and minimum percentages within that 
range to be established by HUD through notice, provided that such 
commercial/non-residential space does not negatively impact the 
residential use of the project or create adverse conditions to the 
occupants of individual condominium units.
    (viii) Acceptable maximum percentages of units with FHA-insured 
mortgages, which must be within a range between 25 and 75 percent of 
the total number of units in the project (which range may be changed 
following the procedures in paragraph (d)(6) of this section), with the 
specific maximum percentage of units with FHA-insured mortgages within 
that range to be established by HUD through notice.
    (ix) Acceptable minimum levels of owner occupancy, including units 
under a bona fide contract to purchase by a purchaser who occupies or 
will occupy the unit as their principal residence as well as a 
purchaser who occupies or intends to occupy the unit as a secondary 
residence, as defined in Sec.  203.18(f)(2), within a range between 25 
and 75 percent of the total number of units in the project (which may 
be changed following the procedures in paragraph (d)(6) of this 
section), with a specific minimum percentage to be established by HUD 
through notice.
    (x) Phasing, provided that only legal phasing is permitted and 
individual phases must contain sufficient numbers of units to be 
separately sustainable as required by HUD, so that the insurance fund 
is not put at undue risk. In determining whether to accept legal 
phasing, HUD will assess the potential risk to the insurance fund and 
other factors that HUD may publish in notices. Phases must meet HUD's 
requirements for approval in paragraph (d) of this section and must at 
a minimum be:
    (A) In a vertical building, contiguous, with all units built out 
and having a certificate of occupancy; or
    (B) In a detached or semi-detached development, consisting of 
groups of adjoining or contiguous homes (which may include, at HUD's 
discretion, easements for utilities and roads serving the homes), where 
all homes in a phase are built out and have a certificate of occupancy;
    (xi) Reserve requirements, provided the reserve account is funded 
with at least 10 percent of the monthly unit assessments, unless a 
lower amount is deemed acceptable by HUD based on a reserve study 
completed not more than 24 months before a request for a lower amount 
is received.
    (xii) Such other matters that may affect the viability or 
marketability of the project or its units.
    (e) The Secretary will publish any generally applicable change in 
the upper and lower limits of the ranges of percentages in paragraphs 
(d)(6)(vii) through (ix) of this section in a notice published for 30 
days of public comment. After considering the comments, the Department 
will publish a final notice announcing the new overall upper and lower 
limits of the range of percentages being implemented, and the date on 
which the new standard becomes effective.
    (f) The Secretary may grant an exception to any specifically 
prescribed requirements within paragraph (d)(6) of this section on a 
case-by-case basis in HUD's discretion, provided that:
    (1) In the case of an exception to the approval requirements for 
the commercial/nonresidential space percentage that HUD establishes 
under paragraph (d)(6)(vii) of this section, any request for such an 
exception and the determination of the disposition of such request may 
be made, at the option of the requester, under the direct endorsement 
lender review and approval process or under the HUD review and approval 
process through the applicable field office of the Department; and
    (2) In determining whether to allow such an exception, factors 
relating to the economy for the locality in which the project is 
located or specific to the project, including the total number of 
family units in the project, shall be considered. A DELRAP lender, in 
determining whether to grant a requested exception, shall follow any 
procedures that HUD may establish.
    (g) Application for Condominium Project approval and Renewal of 
Approval. (1) In order to become

[[Page 66575]]

approved, an application for Condominium Project approval, in 
accordance with the requirements of the Commissioner, must be submitted 
to either HUD or a DELRAP mortgagee, if consistent with the mortgagee's 
DELRAP approval.
    (2) The application will be reviewed and if all eligibility 
criteria have been met, the Condominium Project will be approved and 
placed on the list of HUD-approved Condominium Projects.
    (3) Unless otherwise specified in writing by HUD, Condominium 
Projects are approved for a period of three (3) years from the date of 
placement on the list of approved condominiums. HUD may rescind a 
Condominium Project's approval at any time if the project fails to 
comply with any requirement for approval.
    (4) Eligible parties may request renewal of the approval of an 
approved Condominium Project by submitting a request for 
recertification no earlier than 6 months prior to expiration of the 
approval or no later than 6 months after expiration of the approval. 
HUD shall specify the format for the recertification request, which 
shall allow the request to be supported by updating previously 
submitted information, rather than resubmission of all information. 
However, if the request for recertification is not submitted within 6 
months after the expiration of the Condominium Project's approval, a 
complete, new approval application is required.
    (h) Single-Unit Approval. (1) Limit on Single-Unit Approvals. HUD 
will not insure mortgages in an unapproved project if the percentage of 
such mortgages exceeds an amount determined by the Commissioner to be 
necessary for the protection of the insurance fund, which percentage 
will be specified by the Commissioner by notice.
    (2) Single-Unit Approvals. Mortgagees must ensure that the 
Condominium Unit is located in a Condominium Project that either meets 
the eligibility requirements for approval as set forth in paragraph (d) 
of this section as modified by this paragraph, except that HUD may 
provide that Single-Unit Approvals may be approved by meeting a subset 
of these standards, or less stringent standards, as stated by notice. 
In addition, a unit may be eligible for Single-Unit Approval if it:
    (i) Is not in a Condominium Project that is on the list of FHA-
approved Condominium Projects, or in a project that has been subject to 
adverse determination for significant issues that affect the viability 
of the project;
    (ii) Is in a project that is complete under paragraph (d)(4) of 
this section;
    (iii) Is not a manufactured housing condominium project or 2-4 unit 
project;
    (iv) Is not a manufactured home and is in a project that has at 
least 5 dwelling units; and
    (v) Is in a project in which the amount of Single-Unit Approvals is 
limited to a percentage of the total number of units in the project 
that is within a range of 0 to 20 percent, with the exact percentage 
within that range to be determined by HUD through notice.
    (3) HUD will publish any generally applicable change in the overall 
upper and lower limits of the range stated in paragraph (h)(2)(v) of 
this section by notice published for 30 days of public comment. After 
considering the comments, HUD will publish a final notice announcing 
the new upper and lower limit of the range of percentages being 
implemented, and the date on which the new standard becomes effective.
    (i) Site Condominium. Site condominiums are as defined in Sec.  
203.43b. Site Condominiums must meet all of the requirements of 
paragraph (d)(1) of this section for approval, except that:
    (1) Insurance and maintenance costs must be the sole responsibility 
of the unit owner; and
    (2) Any common assessments collected must be restricted to use 
solely for amenities outside of the footprint of the individual site.
0
5. Amend Sec.  203.50 to revise paragraphs (a)(1) and (f) to read as 
follows:


Sec.  203.50  Eligibility of rehabilitation loans.

* * * * *
    (a) * * *
    (1) The term rehabilitation loan means a loan, advance of credit, 
or purchase of an obligation representing a loan or advancement of 
credit, made for the purpose of financing:
    (i) The rehabilitation of an existing one-to-four unit structure 
which will be used primarily for residential purposes;
    (ii) The rehabilitation of such a structure and refinancing of the 
outstanding indebtedness on such structure and the real property on 
which the structure is located;
    (iii) The rehabilitation of such a structure and the purchase of 
the structure and the real property on which it is located; or
    (iv) The rehabilitation of the interior space or the installation 
of firewalls in the attic of a condominium unit, as defined in Sec.  
203.43b, excluding any exteriors or areas that are the responsibility 
of the Association; and
* * * * *
    (f) The loan may not exceed an amount which, when added to any 
outstanding indebtedness of the borrower that is secured by the 
property, creates an outstanding indebtedness in excess of the lesser 
of:
    (1)(i) The limits prescribed in Sec.  203.18(a)(1) and (3) (in the 
case of a dwelling to be occupied as a principal residence, as defined 
in Sec.  203.18(f)(1));
    (ii) The limits prescribed in Sec.  203.18(a)(1) and (4) (in the 
case of a dwelling to be occupied as a secondary residence, as defined 
in Sec.  203.18(f)(2));
    (iii) Eighty-five (85) percent of the limits prescribed in Sec.  
203.18(c), or such higher limit, not to exceed the limits set forth in 
Sec.  203.18(a)(1) and (3), as the Secretary may prescribe (in the case 
of an eligible non-occupant mortgagor as defined in Sec.  
203.18(f)(3));
    (iv) The limits prescribed in Sec.  203.18a, based upon the sum of 
the estimated cost of rehabilitation and the Commissioner's estimate of 
the value of the property before rehabilitation;
    (2) The limits prescribed in the authorities listed in this 
paragraph (f), based upon 110 percent of the Commissioner's estimate of 
the value of the property after rehabilitation; or
    (3) For any Condominium Unit that is not a detached dwelling, 
attached townhouse dwelling, manufactured home (as defined in 24 CFR 
3280.2), or site condominium (as defined in Sec.  203.43b), 100 percent 
of the after-improvement value of the Condominium Unit.
* * * * *

PART 234--CONDOMINIUM OWNERSHIP MORTGAGE INSURANCE

0
6. The authority citation for part 234 continues to read as follows:

    Authority: 12 U.S.C. 1715b and 1715y; 42 U.S.C. 3535(d).

Subpart A--Eligibility Requirements--Individually Owned Units

0
7. Add Sec.  234.2 to read as follows:


Sec.  234.2  Savings clause.

    Effective [date that is 30 days after the date of publication of 
the final rule], HUD's regulations at Sec.  203.43b of this chapter 
govern approval of real estate consisting of a one-family unit in a 
multifamily project, and an undivided interest in the common areas and 
facilities which serve the project, except where the project has a 
blanket mortgage insured under section 234(d) of the National Housing 
Act, 12 U.S.C.

[[Page 66576]]

1715y(d) (section 234(d)). Where the project has a blanket mortgage 
insured by HUD under section 234(d), this 24 CFR part 234 applies to 
the approval of a one-family unit in such project.

    Dated: September 21, 2016.
Edward L. Golding,
Principal Deputy Assistant Secretary for Housing.
[FR Doc. 2016-23258 Filed 9-27-16; 8:45 am]
BILLING CODE 4210-67-P