[Federal Register Volume 81, Number 192 (Tuesday, October 4, 2016)]
[Rules and Regulations]
[Pages 68297-68299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-23986]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 570

[Docket No. FR-5767-N-05]
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 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 2017.

DATES: Effective Date: November 3, 2016.

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 202-402-4563 (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

    The Consolidated and Further Continuing Appropriations Act, 2015 
(Public Law 113-235, approved December 16, 2014) (2015 Appropriations 
Act) provided that ``the Secretary shall collect fees from borrowers . 
. . to result in a credit subsidy cost of zero for guaranteeing'' 
Section 108 loans. The Continuing Appropriations Act, 2016 (Public Law 
114-53, approved September 30, 2015) continued the 2015 provision. This 
continued funding act was followed by The Consolidated Appropriations 
Act, 2016, Public Law 114-133, approved December 18, 2015) (2016 
Appropriations Act), which had identical language regarding Section 108 
credit subsidy to the 2015 Appropriations Act. The fiscal year 2017 HUD 
appropriations bills under consideration in the House of 
Representatives (H.R. 5394), and the Senate (S. 2844) also have 
identical language regarding the credit subsidy for the Section 108 
Program, and it is expected that, when enacted, the final fiscal year 
2017 appropriations act will as well.
    On November 3, 2015, HUD published a final rule (80 FR 67626) 
following a February 5, 2015 proposed rule (80 FR 6470) that amended 
the Section 108 Program regulations at 24 CFR part 570 to establish 
additional procedures, including procedures for determining the amount 
of the fee and for a 30-day public comment process when HUD adopts 
changes to the assumptions underlying the fee calculation or if the fee 
structure itself raises new considerations for borrowers.
    HUD is required to collect fees from Section 108 borrowers when 
necessary to offset the credit subsidy costs to the Federal government 
to guarantee Section 108 loans. Following

[[Page 68298]]

consideration of the public comments submitted in response to HUD's 
February 5, 2015 proposed rule (80 FR 6469) that proposed the fee 
required to offset the credit subsidy costs, on November 3, 2015, HUD 
issued an announcement of fee (80 FR 67634) 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.

II. FY 2017 Fee: 2.59 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 2017 at 2.59 percent of the 
principal amount of the loan. This amount was proposed in the 
President's FY 2017 budget.\1\ 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 2017, as authorized by the 2017 appropriations act.
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    \1\ The FY 2017 President's Budget for HUD is available at: 
https://www.whitehouse.gov/sites/default/files/omb/budget/fy2017/assets/hud.pdf. The fee is specified in table 6 of the Federal 
Credit Supplement to the 2017 budget and is available at: https://www.whitehouse.gov/sites/default/files/omb/budget/fy2017/assets/cr_supp.pdf
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    For this fee document, HUD is not changing the underlying 
assumptions or creating new considerations for borrowers. The 
calculation of the FY 2017 fee uses the same fee calculation model as 
the FY 2016 announcement of fee, 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.
    As described in 24 CFR 570.712(b), 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) other factors that 
HUD determined were relevant to this calculation (e.g., assumptions as 
to loan disbursement and repayment patterns).
    Taking these factors into consideration, HUD determined that the 
fee for disbursements made under loan guarantee commitments awarded in 
FY 2017 will be 2.59 percent, which will be applied only at the time of 
loan disbursements. Note that future documents may provide for a 
combination of up-front and periodic fees for loan guarantee 
commitments awarded in future fiscal years but, if so, will provide the 
public an opportunity to comment if appropriate under 24 CFR 
570.712(b)(2).
    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 for HUD's guarantee as provided in 24 CFR 570.705(b). 
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. Despite the program's history of no 
defaults, federal credit budgeting principles require that the 
availability of CDBG funds to repay the guaranteed loans cannot be 
assumed in the development of the credit subsidy cost estimate (see 80 
FR 67629, November 3, 2015). Thus, the estimate must incorporate the 
risk that alternative sources are used to repay the guaranteed loan in 
lieu of CDBG funds, and that those sources may be insufficient. Based 
on the rate that CDBG funds are used annually for repayment of loan 
guarantees, HUD's calculation of the credit subsidy cost must take into 
account the possibility of future defaults if those CDBG funds were not 
available. The fee of 2.59 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 2.59 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 the dollar amount of Section 108 loan guarantee commitments 
awarded during the period from FY 2011 through FY 2015, 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 2.59 percent of 
the principal amount of the guaranteed loan, HUD expects that the 
amount generated will fully offset the cost to the Federal government 
associated with making guarantee commitments awarded in FY 2017. Note 
that the FY 2017 fee represents only a .01 percent increase over the FY 
2016 fee of 2.58 percent. This is due primarily to updated loan 
repayment patterns and discount rates used in calculating the present 
value of cash flows. These are variable that ordinarily are modified in 
the credit subsidy calculation.
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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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    This document establishes a rate that does not constitute a 
development decision that affects the physical condition of specific 
project areas or building sites. Accordingly, under 24 CFR 50.19(c)(6), 
this document is categorically excluded from environmental review under 
the National Environmental Policy Act of 1969 (42 U.S.C. 4321).


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    Dated: September 28, 2016.
Harriet Tregoning,
Principal Deputy Assistant, Secretary for Community Planning and 
Development.
[FR Doc. 2016-23986 Filed 10-3-16; 8:45 am]
 BILLING CODE 4210-67-P