[Federal Register: February 13, 2004 (Volume 69, Number 30)]
[Proposed Rules]
[Page 7323-7328]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13fe04-32]
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Part III
Department of Housing and Urban Development
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24 CFR Parts 200, 203 and 291
Nonprofit Organization Participation in Federal Housing Administration
(FHA) Single Family Mortgage Insurance Programs; Proposed Rule
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 200, 203 and 291
[Docket No. FR-4702-P-01]
RIN 2502-AH71
Nonprofit Organization Participation in Federal Housing
Administration (FHA) Single Family Mortgage Insurance Programs
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Proposed rule.
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SUMMARY: Nonprofit organizations, including faith-based and community-
based organizations, are important participants in HUD's single family
housing programs, particularly because of the unique role they play in
their communities. They participate by purchasing HUD-owned properties
at a discount, acting as non-occupant mortgagors, and providing
secondary financing. Unfortunately, nonprofit organizations have
significantly higher default rates than other program participants.
Therefore, HUD has determined that it is necessary to revise its
regulations governing nonprofit organizations in an effort to reduce
the defaults and to create more reasonable conditions for participation
by nonprofit organizations. A significant percentage of nonprofit
organizations that have obtained FHA financing for an unmanageable
number of properties have suffered extraordinarily high rates of
default on multiple-unit properties. The intent of this proposed rule
is to implement conditions and procedures based on HUD's recent
experience with practices and requirements that result in successful
participation by nonprofit organizations in FHA single family mortgage
insurance programs.
Specifically, this rule proposes to require nonprofit organizations
that obtain insured financing from the FHA for 10 or more properties in
a federal fiscal year to prepay at least 80 percent of that total
number of FHA insured mortgages by the end of the second fiscal year
following the fiscal year in which the FHA insured financing was
acquired. Furthermore, this rule would not permit nonprofit
organizations to obtain FHA insurance for mortgages secured by single
family properties with more than two living units, and the rule would
impose additional underwriting guidelines on two-unit properties. The
rule also proposes to codify the existing practice to approve as
participating nonprofit organizations those organizations that provide
evidence of two years of tax-exempt status under the Internal Revenue
Code of 1986, and two consecutive years of housing development
experience within the previous five years.
ADDRESSES: Interested persons are invited to submit comments regarding
this rule to the Regulations Division, Office of General Counsel, Room
10276, Department of Housing and Urban Development, 451 Seventh Street,
SW, Washington, DC 20410-0500. Communications should refer to the above
docket number and title. Facsimile (FAX) comments are not acceptable. A
copy of each communication submitted will be available for public
inspection and copying between 8 a.m. and 5 p.m. weekdays at the above
address.
DATES: Comment Due Date: April 13, 2004.
FOR FURTHER INFORMATION CONTACT: Donna Tomposki, Housing Program Policy
Specialist Coordinator, Department of Housing and Urban Development,
451 Seventh Street, SW., Washington, DC 20410-8000, at (202) 708-0317.
(This is not a toll-free number.) Persons with hearing- or speech-
impairments may access these numbers through TTY by calling the toll-
free Federal Information Relay Service at (800) 877-8339.
SUPPLEMENTARY INFORMATION:
A. Background
Under the National Housing Act, the Secretary has authority to
insure single family mortgages; that is, mortgages on one-to-four
family dwellings on ``such terms as the Secretary may prescribe'' (12
U.S.C. 1709(a)). In accordance with this authority, HUD has issued
regulations and other guidance regarding single family mortgage
insurance establishing the conditions for such insurance. HUD's general
regulations on mortgage insurance are found in 24 CFR part 200.
Specific regulations on nonprofit organizations are found in a new
subpart F of part 200, published on June 6, 2002, at 67 FR 39240.
The requirements for nonprofit organizations that participate in
FHA programs were developed at a time when the FHA had minimal
experience working with nonprofit organizations, and therefore,
insufficient data on the business risks that participation by certain
nonprofit organizations would present. As a result of FHA's experience,
HUD will now require all nonprofit organizations seeking approval to
serve as FHA mortgagors, purchasers of HUD's real estate owned (REO)
properties, or providers of secondary financing to have: (1) Two years
of tax-exempt status under section 501(c)(3) of the Internal Revenue
Code, and (2) two consecutive years of housing development experience
within the previous five years. In this regard, this proposed rule
codifies existing policy and incorporates this tax status and
experience requirement into the regulations of 24 CFR part 291 for
nonprofit organizations acquiring HUD's REO properties.
Over the past nine fiscal years, HUD's Section 203(k) program
(203(k) program), under which HUD may insure loans to nonprofit
organizations for the purchase and rehabilitation of single family
residential properties, has experienced high default and claim rates,
particularly for two-to-four unit properties. Similar problems have
occurred in HUD's other single family mortgage insurance programs in
which nonprofit organizations participate, under Title II of the
National Housing Act. For those reasons, this rule proposes that
nonprofit organizations not obtain FHA insured financing for three- and
four-unit properties. HUD will continue to allow FHA insured financing
for two-unit properties, but will establish additional underwriting
requirements for such properties.
Similar problems have occurred in HUD's other single family
mortgage insurance programs in which nonprofit organizations
participate, under Title II of the National Housing Act, with respect
to nonprofits that hold large numbers of properties with FHA insured
financing in their portfolios. For those reasons, this rule proposes to
establish certain prepayment requirements when nonprofit organizations
obtain FHA insured financing on 10 or more properties in a single
Federal fiscal year. When nonprofit organizations accumulate large
numbers of such properties over a multi-year period (even if they have
not acquired 10 or more in a single fiscal year), HUD may, on a case-
by-case basis, examine those large portfolios to determine whether or
not a certain percentage of the FHA-financed mortgages should be
prepaid before the nonprofit organization will be eligible for
additional acquisition with FHA insured financing. HUD, in this
examination, will look at administrative operations, financial
capacity, and past performance. HUD believes that, as a result, the FHA
single family insured housing programs will experience less risk of
default and that mortgagors and the public generally will be better
served.
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B. This Proposed Rule
This rule would add a new regulatory section to the regulations in
part 200, subpart F, which regulate the participation of nonprofit
organizations in single family insured housing programs, entitled
``Nonprofit Participation.'' This new section proposes that nonprofit
organizations that obtain FHA insured financing for 10 or more
properties during a single fiscal year will be required to prepay at
least 80 percent of that total number by the end of the second fiscal
year following the fiscal year in which the financing was obtained. The
last day of each fiscal year will be the basis for determining the two-
year period, for example, September 30, 2001 to September 30, 2003.
This rule proposes to define this period of time as the ``80 percent
payoff period.'' Nonprofit organizations that do not fulfill this
requirement would not be able to obtain new FHA insured financing
unless 80 percent of the FHA loans acquired during that fiscal year are
prepaid within the 80 percent payoff period. Nonprofit organizations
that have obtained FHA insured financing on a large number of
properties over a multi-year period, but have not acquired 10 or more
within a single fiscal year, may be assessed by HUD on a case-by-case
basis as to their administrative operations, financial capacity, and
past performance prior to being approved for additional FHA insured
financing. HUD may require nonprofit organizations with a large number
of FHA insured mortgages in their portfolios to prepay a percentage of
those mortgages, to be determined by HUD, before allowing such
nonprofit organizations to obtain FHA insured financing on additional
properties.
In order to address issues of high risk in the cases of nonprofit
organizations acting as mortgagors of two-to-four family properties,
the new regulatory section also would restrict nonprofit organizations
in HUD single family insurance programs from obtaining FHA insured
financing on properties that have more than two living units. Because
of the increased risks to the FHA insurance fund, resulting from the
insurance of mortgages on properties with two-to-four units, HUD would
establish additional underwriting guidelines on two-unit properties, in
addition to not allowing acquisition of three- and four-unit properties
with FHA insured financing. Nonprofit organizations that have, as of
the effective date of the final rule, mortgages on properties with more
than two living units in their single family portfolio could retain
those mortgages, but could not add any new mortgages.
A nonprofit organization participating in HUD's single family
insurance programs must be a tax-exempt organization under section
501(a) pursuant to 501(c)(3) of the Internal Revenue Code of 1986 (26
U.S.C. 501(a) and 501(c)(3)), as currently required under 12 U.S.C.
1709(g)(2)(B), and proposed to be implemented in this new regulatory
section in 24 CFR 200.196(b)(1). This rule would require submission to
HUD of the Internal Revenue Service (IRS) letter of determination as
verification of tax-exempt status, which demonstrates two years of such
status, and certification of the nonprofit's compliance with any IRS
requirement to provide notice of changes in the organization's
character, purpose, or methods of operation. This rule would also
provide that nonprofit organizations may not assume the Employer
Identification Number (EIN) of a dormant or defunct nonprofit
organization.
Furthermore, this rule would change existing policy as explained in
Mortgagee Letter 96-52 that permitted nonprofit organizations to
substitute two years of community service for two years of housing
development experience. Under this rule, HUD proposes to require
participating nonprofit organizations to have a minimum of two
consecutive years of housing development experience within the previous
five years.
This rule would also require that participating nonprofits be
included in the Nonprofit Organization Roster pursuant to 24 CFR
200.194. Finally, this proposed rule would make conforming amendments
to 24 CFR 203.18, 203.41, and 291.5.
HUD continues to strongly encourage the participation of nonprofit
organizations, including community and faith-based organizations, in
its programs. This proposed rule is not designed to place particular
burdens on participation by nonprofit organizations. Rather, the
proposed rule is designed to ensure that nonprofit organizations have
the capacity, experience, and interest to participate in HUD's housing
programs. Additionally, the rule is designed to ensure the integrity of
FHA's insurance funds and the continued availability of insurance for
nonprofit organizations and other FHA participants.
Findings and Certifications
Public Reporting Burden
The information collection requirements contained in this proposed
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) and are
pending OMB approval. In accordance with the Paperwork Reduction Act,
HUD 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 proposed rule is estimated as follows:
Reporting and Recordkeeping Burden
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Estimated
Number of average Estimated
Section reference Number of responses time for annual
parties per requirement burden (in
respondent (in hours) hours)
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200.196(a)(5) (Certification of compliance with IRS 400 1 .50 200
regulations pertaining to nonprofits, including any
requirement that the nonprofit notify the IRS of any change
in its character, purpose, or methods of operation)........
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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;
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(3) Enhance the quality, utility, and clarity of the information to
be collected; and
(4) Minimize the burden of the collection of information on those
who are to respond, including through the use of appropriate automated
collection techniques or other forms of information technology, e.g.,
permitting electronic submission of responses.
Interested persons are invited to submit comments regarding the
information collection requirements in this proposal. Under the
provisions of 5 CFR part 1320, OMB is required to make a decision
concerning this collection of information between 30 and 60 days after
today's publication date. Therefore, a comment on the information
collection requirements is best assured of having its full effect if
OMB receives the comment within 30 days of today's publication. This
time frame does not affect the deadline for comments to the agency on
the proposed rule, however. Comments must refer to the proposal by name
and docket number (FR-4702) and must be sent to:
Melanie Kadlic, OMB Desk Officer, Office of Management and Budget, Room
10235, New Executive Office Building, Washington, DC 20503, Fax Number
(202) 395-6947, Email: mkadlic@omb.eop.gov
and
Kathleen McDermott, Reports Liaison Officer, Office of the Assistant
Secretary for Housing-Federal Housing Commissioner, Department of
Housing and Urban Development, 451 Seventh Street, SW, Room 9116,
Washington, DC 20410-8000.
Executive Order 12866
The Office of Management and Budget (OMB) reviewed this rule under
Executive Order 12866, Regulatory Planning and Review. OMB determined
that this rule is a ``significant regulatory action,'' as defined in
section 3(f) of the Order (although not economically significant, as
provided in section 3(f)(1) of the Order). Any changes made to the rule
subsequent to its submission to OMB are identified in the docket file,
which is available for public inspection in the Regulations Division,
Office of the General Counsel, Room 10276, 451 Seventh Street, SW.,
Washington, DC 20410-0500.
Regulatory Flexibility Act
The impact of this proposed rule would be minimal, and the program
changes contained in this rule are necessary to reduce claim and
default rates and protect the health of the FHA insurance fund. The
single family mortgage insurance program is currently being misused by
some nonprofit agencies that use this mortgage insurance to administer
large-scale rental-housing programs, rather than provide for
homeownership opportunities. In the past, some nonprofit agencies
administering these programs have accumulated portfolios of over 300
properties. The single family program was not designed to accumulate a
portfolio of rental properties. Various other offices within HUD have
venues for rental housing, such as the Office of Multifamily Housing,
which offers rental-housing programs, and the Office of Community
Planning and Development, which administers the HOME Investment
Partnerships program.
HUD expects that requiring 80 percent prepayment over two years in
the case of nonprofit organizations that obtain FHA insured financing
on 10 or more properties in a fiscal year will affect relatively few
nonprofits out of approximately 500 active nonprofit entities that
participate with the FHA in its programs, and will create a prudent
limitation without unduly burdening the ability of nonprofits to obtain
FHA insured financing. For those nonprofit agencies affected by this
rule, the Department has taken steps to assure fairness for current
program participants by allowing the nonprofit agency the ability to
retain current properties, but establishing a restriction on acquiring
new FHA insured financing until the 80 percent payoff goal is met. In
addition, those nonprofit agencies that have single family properties
with three- and four-unit dwellings may retain these properties, but
will not be permitted to obtain additional three- and four-unit
properties.
Notwithstanding HUD's determination that this rule does not have a
significant economic impact on a substantial number of small entities,
HUD specifically invites comment regarding less burdensome alternatives
to this rule that will meet HUD's objectives as described in the
preamble.
Environmental Impact
A Finding of No Significant Impact with respect to the environment
was 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,
Room 10276, 451 Seventh Street, SW., Washington, DC 20410-0500.
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
affects only private nonprofit organizations and does not have
federalism implications and does not impose substantial direct
compliance costs on state and local governments or preempt state law
within the meaning of the Executive Order.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (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 on the private sector. This proposed rule does
not impose any federal mandates on any state, local, or tribal
governments, or on the private sector, within the meaning of the UMRA.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance numbers applicable to
the programs affected by this rule are: 14.108, 14.112, 14.117, 14.121,
and 14.133.
List of Subjects
24 CFR Part 200
Administrative practice and procedure, Claims, Equal employment
opportunity, Fair housing, Home improvement, Housing standards, Lead
poisoning, Loan programs--housing and community development, Mortgage
insurance, Organization and functions (Government agencies), Penalties,
Reporting and recordkeeping requirements, Social Security, Unemployment
compensation, Wages.
24 CFR Part 203
Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and
recordkeeping requirements, Solar energy.
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24 CFR Part 291
Community facilities, Conflict of interests, Homeless, Lead
poisoning, Low and moderate income housing, Mortgages, Reporting and
recordkeeping requirements, Surplus government property.
For the reasons stated in the preamble, HUD proposes to amend 24
CFR parts 200 and 291 as follows:
PART 200--INTRODUCTION TO FHA PROGRAMS
1. The authority citation for 24 CFR part 200 continues to read as
follows:
Authority: 12 U.S.C. 1702-1715z-21; 42 U.S.C. 3535(d).
2. Add a new Sec. 200.196 to read as follows:
Sec. 200.196 Participation of nonprofit organizations.
(a) Definitions. ``80 percent payoff period'' means the period from
the end of the fiscal year in which a nonprofit organization has
obtained FHA insured financing on 10 or more properties to the end of
the second fiscal year following that date.
(b) Eligibility requirements. An eligible nonprofit organization,
in order to participate in HUD single family insurance programs, must
comply with applicable requirements, including the following:
(1) Provide a currently valid Letter of Determination from the
Internal Revenue Service (IRS) confirming that it is tax-exempt under
section 501(a) pursuant to section 501(c)(3) of the Internal Revenue
Code of 1986 (26 U.S.C. 501(a) and 501(c)(3)), and has maintained such
status for at least 2 consecutive years;
(2) Have at least 2 consecutive years of housing development
experience within the previous 5 years as demonstrated by previous
experience purchasing, rehabilitating, and reselling residential
properties, and financial and administrative capacity as determined by
the Secretary;
(3) Certify biennially to HUD that it is in compliance with IRS
regulations pertaining to tax-exempt organizations, including any
requirement that the nonprofit notify the IRS of any change in its
character, purpose, or methods of operation;
(4) Have a voluntary board;
(5) Have no part of its net earnings inure to the benefit of any
member, founder, contributor, or individual of the organization;
(6) Have a functioning accounting system that is operated in
accordance with generally accepted accounting principles, or designate
an entity to maintain a functioning accounting system for the
organization in accordance with generally accepted accounting
principles;
(7) Have and maintain a policy and practice of nondiscrimination in
accordance with 24 CFR 5.105(a);
(8) Be included on the Nonprofit Organization Roster pursuant to 24
CFR 200.194; and
(9) Not assume or use the Employer Identification Number (EIN) of a
dormant or defunct nonprofit organization.
(c) Origination limitations. (1) Once an eligible nonprofit
organization has obtained, in a single fiscal year, FHA insured
financing for 10 or more properties, it must prepay at least 80 percent
of the FHA insured mortgages acquired in that year within the 80
percent payoff period, or it will not be eligible for further FHA
insured financing;
(2) An eligible nonprofit organization will not be approved for FHA
insured financing for three- and four-unit properties, and must meet
HUD's underwriting requirements for FHA insured financing for two-unit
properties.
(d) Nonprofit organizations that currently have portfolios that
exceed origination limitations. A nonprofit organization or entity
that, as of the effective date of this regulation:
(1) Has outstanding FHA insured financing on a large number of
properties over a multi-year period, regardless of whether it had
acquired 10 or more within a single fiscal year, may be assessed by HUD
as to its administrative operations, financial capacity, and past
performance prior to being approved for additional FHA insured
financing. HUD may require nonprofit organizations with large FHA
portfolios to prepay a percentage, to be determined by HUD, of FHA
insured mortgages before allowing such nonprofit organizations to
obtain additional FHA insured financing;
(2) Has FHA insured mortgages on single family properties with
three- and four-dwelling units may continue to retain that financing
but may not obtain any other or additional FHA mortgage insurance on
other such properties.
(e) Applicability. This section applies to single family mortgage
insurance programs pursuant to Title II of the National Housing Act and
to discount purchases by nonprofit organizations without insurance
under part 291 of this chapter.
3. Amend Sec. 203.18 by revising paragraph (f)(3) to read as
follows:
Sec. 203.18 Maximum mortgage amounts.
* * * * *
(f) * * *
(3) Eligible non-occupant mortgagor means a mortgagor (or co-
mortgagor, as appropriate) who is not to occupy the dwelling as a
principal residence or a secondary residence and who is--
(i) A public entity, as provided in section 214 or section 247 of
the National Housing Act, or any other State or local government or
agency thereof;
(ii) A private nonprofit organization or public entity, as provided
in section 221(h) or section 235(j) of the National Housing Act, or
other private nonprofit organization that is exempt from taxation under
section 501(a) pursuant to 501(c)(3) of the Internal Revenue Code of
1986 (26 U.S.C. 501(a) and 501(c)(3)), and that complies with the
requirements of 24 CFR 200.196 and intends to sell the mortgaged
property to low or moderate income persons, as determined by the
Secretary;
(iii) An Indian tribe, as provided in section 248 of the National
Housing Act;
(iv) A serviceperson who is unable to meet the occupancy
requirement because of his or her duty assignment, as provided in
section 216 of the National Housing Act or section 222(b)(4) or (f) of
the National Housing Act;
(v) A mortgagor or co-mortgagor in section 203(k) of the National
Housing Act (including nonprofit organizations, if they are in
compliance with the requirements of 24 CFR 200.196); or
(vi) A mortgagor who, pursuant to Sec. 203.43(c) of this part, is
refinancing an existing mortgage insured under the National Housing Act
for not more than the outstanding balance of the existing mortgage, if
the amount of the monthly payment due under the refinancing mortgage is
less than the amount due under the existing mortgage for the month in
which the refinancing mortgage is executed.
* * * * *
4. Amend Sec. 203.41 by revising paragraph (a)(5) to read as
follows:
Sec. 203.41 Free assumability; exceptions.
(a) * * *
(5) Eligible nonprofit organization means a secular or faith-based
organization that has tax-exempt status under section 501(a) pursuant
to section 501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C.
501(a) and 501(c)(3)), and which meets the eligibility requirements
stated in 24 CFR 200.196(b). The organization must comply with the
requirements of 24 CFR 200.196(c) and (d) in obtaining FHA insured
financing.
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PART 291--DISPOSITION OF HUD-ACQUIRED SINGLE FAMILY PROPERTY
5. The authority citation for 24 CFR part 291 continues to read as
follows: 12 U.S.C. 1701 et seq.; 42 U.S.C. 1441, 1441a, 1551a, and
3535(d).
6. Revise the definition of ``private nonprofit organization'' in
paragraph (b) of Sec. 291.5 to read as follows.
Sec. 291.5 Definitions.
* * * * *
(b) * * *
Private nonprofit organization means a secular or faith-based
organization, no part of the net earnings of which may inure to the
benefit of any member, founder, contributor, or individual. The
organization must meet the eligibility requirements stated in 24 CFR
200.196(b). If obtaining FHA insured financing, the organization must
comply with the additional requirements of 24 CFR 200.196(c) and (d).
* * * * *
Dated: January 12, 2004.
Sean Cassidy,
General Deputy Assistant Secretary for Housing--Federal Housing
Commissioner.
[FR Doc. 04-3138 Filed 2-12-04; 8:45 am]
BILLING CODE 4210-27-P