Management Rules for Existing Projects for the Elderly

SUMMARY: This final rule amends the provisions of 24 CFR part 885 which

govern projects that received direct loans under section 202 of the

Housing Act of 1959 and housing assistance under section 8 of the

United States Housing Act of 1937. The rule adds regulatory provisions

to govern the housing assistance payments contract, project operations

and project management.

EFFECTIVE DATE: February 9, 1995.

FOR FURTHER INFORMATION CONTACT: With respect to Section 202 issues

contact: Margaret Milner, Acting Director, Office of Elderly and

Assisted Housing, Department of Housing and Urban Development, 451

Seventh Street SW., Room 6130, Washington, DC 20410; telephone (202)

708-4542. With respect to Section 8 issues contact: Barbara Hunter,

Acting Director, Planning and Procedures Division, Office of

Multifamily Housing Management, Room 6182, Department of Housing and

Urban Development, 451 Seventh Street, S.W., Washington, D.C. 20410;

telephone (202) 426-3970. Hearing or speech impaired individuals may

call HUD's TDD number (202) 708-4594. (These are not toll-free

numbers.)

SUPPLEMENTARY INFORMATION:

I. Paperwork Burden

The information collection requirements contained in this rule have

been approved by the Office of Management and Budget (OMB) under the

Paperwork Reduction Act of 1980 (44 U.S.C. 3501-3520), and assigned OMB

control number 2502-0371.

II. Background

HUD's regulations at 24 CFR part 885, subpart B govern projects

that received direct loans under section 202 of the Housing Act of 1959

and housing assistance payments under section 8 of the United States

Housing Act of 1937 (section 202/8 program). This subpart contains

provisions governing the development of section 202/8 projects

including the loan fund allocation process, application procedures, and

loan financing procedures. There are no regulatory provisions governing

the housing assistance payments contract (HAP contract) (except

Sec. 885.425 on HAP contract execution) or governing the management and

operation of section 202/8 projects (except for preference rules

published on July 18, 1994 at 59 FR 36616). On December 9, 1987 (52 FR

46614), HUD published a proposed rule adding such provisions. In

response to the proposed rule, HUD received six comments. The comments

and HUD's responses are discussed below.

On June 20, 1989 (54 FR 25960), HUD published a final rule adding a

new subpart C to part 885. That subpart, which implemented amendments

to the section 202 program contained in section 162 of the Housing and

Community Development Act of 1987, governs section 202 housing for

nonelderly handicapped families and individuals. Such housing does not

receive assistance under section 8, but receives a new type of project

assistance. On June 12, 1991, HUD published two interim rules (56 FR

27104, 56 FR 27070) providing for the continued applicability of part

885 to projects for which section 202 loan reservations were made in FY

1990 and prior years. These interim rules also added new parts 889 and

890 to establish the Supportive Housing for the Elderly Program and

Supportive Housing for Persons with Disabilities Program and to enable

FY 1991 funding of projects under those programs. Requirements relating

to capital advances and project rental assistance contracts (these new

projects do not receive section 8 rental assistance) were published

August 12, 1992 at 57 FR 36338 and 57 FR 36330, and management rules

for these new programs will be published shortly.

Public Comments

Part 813. A commenter requested that HUD provide further

information regarding the relationship between part 813 and part 885.

The commenter also requested clarification concerning which part will

govern if there are inconsistencies between the parts.

Section 813.1, which was not proposed for amendment in the proposed

rule, currently provides the definitions, policies, and procedures

related to income limits, and the determination of eligibility, income

and rent for applicants and tenants in housing assisted under section 8

including section 8 projects for which loans are made under section 202

of the Housing Act of 1959. HUD is unaware of any inconsistencies

between part 813 and part 885, other than differences between the

definitions of elderly and handicapped families. These differences

reflect statutory definitions applicable to the section 8 and section

202 programs (see the definition of ``families'' and ``elderly family''

in section 3(b)(3) of the United States Housing Act of 1937, and the

definition of ``elderly or handicapped families'' in section

202(d)(4)). To the extent of these or any other inconsistencies, the

part that more specifically addresses the program (i.e., part 885) will

govern. References have been added for part 889 (Supportive Housing for

the Elderly) and part 890 (Supportive Housing for Persons with

Disabilities).

Definitions (Sec. 885.5). A new definition of handicapped person or

individual was added to part 885 in the final rule published June 20,

1989 implementing section 162 of the Housing and Community Development

Act of 1987. In that rule, HUD proposed the same definition of

handicapped person or individual that was contained in the proposed

rule for the section 202/8 program. (Both proposed rules included a

revised definition of handicapped person or individual that contained

specific definitions of developmentally disabled and chronically

mentally ill. Alcoholism and drug addiction were specifically excluded

from the definition of chronically mentally ill unless the individual

has a disabling condition required for eligibility.)

Commenters to both proposed rules made substantially the same

comments on the proposed definition. Some commenters argued that the

exclusion of alcoholism and drug addiction was contrary to section 504

of the Rehabilitation Act of 1973 which specifically extends coverage

to alcoholics and drug addicts. Other commenters supported the

exclusion of such persons.

In the June 20, 1989 final rule, HUD responded to these objections

and substituted new language that provided that a person whose sole

impairment is alcoholism or drug addiction (i.e., who does not have a

developmental disability, chronic mental illness or physical disability

which is the disabling condition required for eligibility in a

particular project) will not be considered to be handicapped for the

purposes of the section 202 program. The discussion of these changes

can be found at that rule at 54 FR 25962, and is adopted without change

for the [[Page 2659]] purposes of this rule. Because the definitions

section of part 885 governs both the section 202 handicapped housing

program and the section 202/8 program, the text of the final rule

adopted today does not include a definition.

Term of HAP contract (Sec. 885.505). The proposed rule at

Sec. 885.505 provided that the term of the HAP contract for assisted

units in section 202/8 projects is 20 years. If the project is

completed in stages, the term of the HAP contract for all assisted

units in all stages of a project may not exceed 22 years. One commenter

recommended that HUD should provide short extensions of the HAP

contract if the facility or the tenants would suffer an undue hardship

without the extension. Section 885.535 already provides that HUD and

the Borrower may agree to extend the term of the HAP contract or to

renew the HAP contract upon the expiration of the term of the contract.

This section has been clarified to state that any extension or renewal

is subject to the availability of funding.

Fair Market rents. One commenter recommended that the Department

develop additional language in part 885 specifying how fair market

rents (FMRs) will be calculated for section 202/8 facilities. This

commenter claimed that the Department's method of calculating FMRs was

not economically feasible for many section 202 facilities. Under the

section 202/8 program, the applicable published FMRs were used in

development processing to determine the amount reserved for the section

8 funding and served as a limit on the amount of the section 202 loan

that could be made. They served as the initial contract rents (although

they could be adjusted based on the amount of the loan). Thereafter,

the contract rents are adjusted based on the project's approved budget

or by the annual (and special) adjustment factor as specified in the

contract. HUD believes that the regulations are sufficiently specific.

No additional provisions have been included in this rule, particularly

since no new reservations are subject to section 8 FMRs.

Leasing to eligible families (Sec. 885.515). Proposed Sec. 885.515

implemented section 325(1) of the Housing and Community Development Act

of 1981 which requires that HAP contracts for new construction and

substantial rehabilitation must provide that during the term of the HAP

contract, the owner shall make available for occupancy by eligible

families the number of units for which assistance is committed under

the HAP contract. Under the proposed rule making units available for

occupancy by eligible families required the Borrower: (1) to conduct

marketing in accordance with Sec. 885.600(a) (i.e., the Borrower must

commence and continue diligent marketing activities not later than 90

days before the anticipated date of availability for occupancy of the

first unit and marketing must be performed in accordance with a HUD-

approved affirmative marketing plan and all fair housing and equal

opportunity requirements); (2) lease or make good faith efforts to

lease the units to eligible and otherwise acceptable families,

including taking all feasible actions to fill vacancies by renting to

such families; and (3) not reject any such applicant family except for

reasons acceptable to HUD. The proposed rule stated that if the

Borrower is temporarily unable to lease all assisted units to families

that are eligible to occupy them, one or more units may, with the prior

approval of HUD, be leased to ``ineligible families'' (i.e., families

that meet the section 202 handicapped or elderly eligibility

requirements, but cannot meet the income eligibility requirements).

A commenter argued that the proposed rules do not adequately ensure

that effective outreach techniques will be used. The commenter argued

that once the Borrower complies with HUD's general fair housing and

equal opportunity requirements and continues this outreach strategy for

90 days, its marketing obligations would be fulfilled and the Borrower

would be free to rent to ineligible tenants. The commenter argued that

the final rule should require Borrowers to specifically target the

elderly and handicapped populations in their outreach strategies.

Further, the commenter suggested that HUD provide for the use of a

centralized computer system for matching Borrowers and tenant

applicants.

HUD believes that the regulations are adequate to ensure that the

Borrower will market to eligible handicapped and elderly families. HUD

notes that, in addition to the marketing requirements cited by the

commenter, making units available to eligible families requires the

Borrower to demonstrate that it has leased or is making good faith

efforts to lease units to eligible and otherwise acceptable families.

Without such a showing, HUD will not approve a Borrower's request for

permission to lease to ineligible families. Moreover, the Affirmative

Fair Housing Marketing Plan is in effect for the duration of the

Federal financial assistance. While affirmative marketing efforts must

commence at least 90 days prior to the initial rent-up, they also must

continue throughout the life of the Federal financial assistance. In

light of the expense involved in the establishment of a centralized

computer system and questions concerning the necessity of a system, HUD

has rejected the commenter suggestion regarding the provision of a

computerized system for matching Borrowers and tenant-applicants.

One commenter argued that the provision permitting the Borrower to

lease to ineligible families is unnecessary since sufficient numbers of

income-eligible families can be located if Borrowers make an effort.

The commenter feared that this exception would lead to other practices

or exceptions that would undermine efforts to serve the poor and the

homeless.

The proposed provision has been retained in the final rule. The

failure to achieve necessary occupancy could impair project operations

to the detriment of tenants and would ultimately create a danger of a

default on the section 202 loan. Such a default and foreclosure could

result in the project being entirely disassociated from its original

purpose, if purchased by an outside bidder. Accordingly, HUD has

concluded that the proposed provision may be essential in order to

preserve certain projects for the benefit of present and future

eligible tenants. HUD believes that the requirement for prior approval

will ensure adequate supervision of the project and will prevent the

abuses predicted by the commenter.

A commenter suggested that the final rule should be revised to

permit Borrowers, without prior HUD authorization, to rent up to five

percent of the units to low-income families where very low-income

families are not available to fill a vacancy. Section 16 of the United

States Housing Act of 1937 establishes limitations on the admission to

the Section 8 and public housing programs of low-income families, but

not very low income. HUD has implemented this national limitation by

prohibiting the admission of families in this category, unless the

owner has received prior HUD approval (see Secs. 813.105 and 913.105).

Section 103 of the Housing and Community Development Act of 1987 and

section 1001 of the Stewart B. McKinney Homeless Assistance Amendments

Act of 1988 amended the United States Housing Act of 1937 to state that

HUD may not totally prohibit admission of lower income families other

than very low-income families, shall establish an appropriate specific

percentage of lower income families other than very low-

[[Page 2660]] income families that may be assisted in each assisted

housing program, and shall prohibit project owners from selecting

families for residence in an order different from the order on the

waiting list for the purpose of selecting relatively higher income

families for residence. A final rule implementing the 1987 amendment

was published on September 6, 1988 (53 FR 34412).

Section 16(b) of the United States Housing Act of 1937 was amended

by the Cranston-Gonzalez National Affordable Housing Act (CGNAHA) by

striking 5% and inserting 15% and adding the following new paragraph:

``Not more than 25 percent of the dwelling units in any project of any

agency shall be available for occupancy by low-income families other

than very low-income families. The limitation shall not apply in the

case of any project in which, before the enactment of the CGNAHA, such

low-income families occupy more than 25 percent of the dwelling

units.'' The Department is pursuing rulemaking to implement these

changes.

Notice upon HAP contract expiration (Sec. 885.530). Proposed

Sec. 885.530 implements section 8(c)(8) of the United States Housing

Act of 1937 which governs the Borrower's notification of tenants upon

the expiration of the HAP contract. A commenter recommended that the

final rule also include a requirement that HUD notify the Borrower one

year before the expiration of the contract term. Section 262 of the

Housing and Community Development Act of 1987 added a new section

8(c)(9) to the United States Housing Act of 1937. This new provision

imposed a requirement on the owner to give one year's notice prior to

the termination. This new provision was self-implementing and HUD

issued instructions on this provision to all Section 8 owners

(including section 202/8 owners) in a memorandum dated July 6, 1988.

Responsibilities of Borrower (Sec. 885.600). Paragraph (d)(1) of

Sec. 885.600 (responsibilities of Borrower) provided that financial

statements must be provided to HUD 60 days after the end of each fiscal

year of operations. A commenter suggested that Borrowers be given an

option in the HAP contract (with provisions for adjustment) to

determine the dates to be used for the fiscal year. The HAP contract

permits fiscal years ending on March 31, June 30, September 30, or

December 31. While Borrowers may request a fiscal year ending on any of

these dates, such requests are subject to approval by HUD.

Under Sec. 885.600(d)(2), the Borrower must provide such other

statements regarding project operation, financial condition, and

occupancy as HUD may require to administer the HAP contract and to

monitor project operations. A commenter requested HUD to explain or

provide examples of such ``other statements''. Other statements will

include: monthly accounting statements; tenant assistance payments

requests and special claims requests (claims for unpaid rent, tenant

damages and other charges and claims for vacancy loss); and quarterly

and annual occupancy reports.

Proposed paragraph (e) required the maintenance of a project fund

account. All funds remaining in the project fund account following the

expiration of the project's fiscal year (i.e., the excess of project

income over project operating expenses, required principal and interest

payment and deposits to the replacement reserve) were required to be

deposited in the replacement reserve account following the expiration

of the fiscal year. The final rule has been revised to conform to the

practices currently applied in the section 8 program. These practices

provide that the remaining funds are deposited in a residual receipts

account. Amounts in this account may be used to reduce housing

assistance payments and for other project purposes with the approval of

HUD. Upon termination of the contract any excess funds must be remitted

to HUD.

Replacement reserve (Sec. 885.605). One commenter thought that

proposed Sec. 885.605, which governs the amount of the replacement

reserve, required a contribution of .6 percent for the first year and

.4 percent for the second year of operations. After the first two

years, the commenter recommended the use of a sliding scale (based on

the age of the building) to maintain an adequate reserve.

This commenter has misread the proposed rule. The proposed rule

provided that the annual amount of the deposit is .6 percent of the

cost of the total structure (for new construction projects) or .4

percent of the cost of the initial mortgage (for all other projects).

This amount would have been required for deposit and adjusted yearly by

the amount of the annual adjustment factor and may be reduced if HUD

determines that the reserve has reached a level sufficient to meet

project requirements (see Sec. 885.605(b) and (c)). To provide

flexibility, HUD has decided not to specify a percentage of cost amount

in the final rule, instead HUD will determine the amount whenever

appropriate.

Another commenter suggested that HUD permit Borrowers to use the

replacement reserve for preventive and maintenance efforts, and for

physical adjustments necessary to accommodate the needs of residents

aging in place. The proposed change has not been made. The purpose of

the replacement reserve is to ensure that sufficient funds will be

available to provide for extraordinary maintenance, and repair and

replacement of capital items (e.g., replacement of structural elements

and mechanical equipment in the project.) Operating expenses such as

day-to-day maintenance requirements and preventive maintenance expenses

are to be paid from operating revenues. Currently, Borrowers may

request HUD to approve the use of the replacement reserve for payments

for some items to accommodate aging residents. If such requests are

approved, however, HUD requires the Borrower to replenish the reserve.

Selection and admission of tenants (Sec. 885.610). Proposed

Sec. 885.610 stated that the Borrower is responsible for deciding

whether an applicant is eligible for admission to the project.

Applicants for admission must meet the eligibility requirements

applicable to them under the section 202/8 program concerning age or

handicap, and income. The preamble noted that in addition to these

admission requirements, Borrowers would be permitted to develop and

implement additional tenant selection criteria.

A commenter representing a disability group argued that the rule

would give Borrowers too much discretion in the selection of tenants

and would require Borrowers to make determinations beyond their areas

of expertise. The commenter objected to the example cited in the

preamble that stated that a Borrower could refuse to admit an otherwise

eligible applicant, if the applicant is unable to live independently in

the project without support services that he or she needs, but which

are not available. The commenter predicted that such Borrower

determinations could be arbitrary and constitute discrimination against

the handicapped. The commenter suggested that these determinations

should be left to the tenant-applicant.

Section 8 allows owners the discretion to establish which of the

eligible applicants they want to admit as tenants. This allows an owner

to establish ``suitability'' requirements, such as that tenants be able

to live independently, and, concomitantly, to make decisions on whether

a particular applicant meets those criteria. HUD, through this

regulation, is creating a procedure to appeal an owner's initial

[[Page 2661]] admission determination, if an applicant thinks it is

wrong. Therefore, an applicant will have an opportunity to correct an

owner's suitability decision to the extent it leads to an unlawful

admission determination (such as one in violation of the civil rights

laws, including section 504).

While the owner of section 202 ``elderly'' project may only

consider applicants ``suitable'' if they can live independently--an

applicant for a section 202 ``handicapped'' project must ``have an

impairment which * * * substantially impedes his ability to live

independently'' and that ``could be improved by more suitable housing

conditions.'' See section 202(d)(4).

The example in the preamble to the section 202 rule regarding

ability to live independently reflected the proposed rule implementing

section 504 of the Rehabilitation Act of 1973 (29 U.S.C. 794). The

proposed section 504 rule defined qualified handicapped person, in

part, with regard to the person's capacity for independent living. In

the final section 504 rule published June 2, 1988 (53 FR 20216), HUD

dropped references to the ability to live independently from the

definition of qualified individual with handicaps. Instead, the

definition was revised to focus on the handicapped individual's

capacity to comply with all obligations of occupancy whether without

supportive services or with supportive services provided by persons

other than the recipient. Thus, Borrowers must make a determination

whether an applicant can fulfill all obligations of occupancy. In a

project that does not provide supportive services, it is irrelevant

whether the obligations of tenancy are met by the individual alone or

with assistance that the individual with handicaps arranges. Further,

in making eligibility determinations, a presumption in favor of the

individual's own assessment of his or her capabilities is warranted in

absence of evidence to the contrary.

Under the proposed rule, a tenant-applicant may request a review of

the Borrower's determination of ineligibility. The review would be made

by a member of the Borrower's staff who did not make the initial

decision to reject. A commenter noted that many projects would be

unable to comply with this requirement because their staffs are too

small. As an alternative, the commenter suggested that HUD permit such

Borrowers to convene a panel to review determinations.

The final rule has been revised to permit the Borrower (with prior

HUD approval) to appoint a panel of individuals to review eligibility

determinations, if the size of the Borrower's staff will not permit a

review by a member of the staff that did not make the original

decision. Under these circumstances, HUD will approve the panel if the

Borrower demonstrates that the members of the panel are qualified to

make eligibility determinations (e.g., members of the staff of a

comparable section 8 project in the area).

Based on the broad discretion provided to Borrowers in the

development and implementation of tenant selection procedures, one

commenter suggested that HUD should provide a review of Borrower's

selections through the provision of administrative hearings to

applicants that are rejected for tenancy. HUD is mindful of its duty to

assure that the policies implemented by Borrowers are enforced in a

non-arbitrary and non-discriminatory manner. However, rather than

establishing a burdensome administrative review process, HUD believes

that its role should be limited to the provision of tenant selection

guidance by regulations and through other issuances, and to the review

of the Borrower's tenant selection plan and procedures during the

management review of the project. HUD has limited authority in this

area, i.e., to reject an owner's criteria for selecting among

statutorily eligible applicants only when the criteria the owner uses

to determine whether applicants would be suitable tenants would violate

the civil rights laws, such as section 504 of the Rehabilitation Act.

(In addition to the regulatory guidance found in the final rule, HUD

notes that Occupancy Requirements of Subsidized Multifamily Housing

Programs (HUD handbook-4350.3 Chg-1, 2-15, 2-16 and 2-17) require

Borrowers to develop a written tenant selection plan covering such

matters as procedures for accepting applications and screening tenants,

fair housing and equal opportunity requirements, preferences and

priorities required by HUD or established by the Borrower, etc., and

provide additional administrative guidance on permitted and prohibited

screening criteria.)

Federal selection preferences. A final rule revising tenant

selection preferences including preferences requirements for this

program was published on July 18, 1994 at 59 FR 36616. Section 885.427

was revised to incorporate the preference provisions of Secs. 880.613-

880.617.

Overcrowded and underoccupied units (Sec. 885.620). Proposed

Sec. 885.620 governs unit transfers where the Borrower has determined

that an assisted unit is overcrowded or underoccupied. A commenter was

concerned that the proposed regulations would permit a Borrower to

force a tenant to change apartments in order to comply with the unit

size requirements. The commenter argued that this requirement may

conflict with State and local laws that prohibit a landlord from moving

an unwilling tenant. The commenter recommended that the final rule

permit flexibility in complying with HUD requirements.

The Department is charged with the responsibility for assuring that

housing assistance payments are used efficiently, including the

appropriate assignment and reassignment of families to units of a

proper size. Accordingly, the final rule provides that the Borrower

will, as promptly as possible, offer the family an appropriate

alternate unit. Contrary to the commenter's fears, the rule would not

permit the Borrower to force an unwilling tenant to move. The existing

HUD procedures permit the tenant to remain in the unit and pay the

market rent, or move within 30 days of the notification that a unit of

the required size is available within the project.

Lease requirements (Sec. 885.625). Under Sec. 885.625, the lease

must contain all required provisions and none of the prohibited

provisions specified by HUD. One commenter argued that HUD should

prepare a new model lease for section 202/8 projects. This commenter

attached a copy of a proposed lease and encouraged HUD to adopt it in

the Section 202 handbook. HUD has prepared a new model lease and it is

available from HUD Field Offices and is contained in the 4350.3

Handbook Chg. 22, Appendix 19C, dated June 1992.

Security Deposits (Sec. 885.635). Under proposed Sec. 885.635, the

Borrower must require each family occupying an assisted unit to pay a

security deposit in an amount equal to one month's total tenant payment

or $50, whichever is greater. A commenter argued that the minimum

security deposit should be increased to $100. The commenter argued that

this amount represents a reasonable minimum tenant contribution, would

safeguard the Borrower, and would reduce the cost of unpaid charge

claims and tenant damage reimbursement requests.

The $50 limit is the minimum deposit that is currently required

under the section 202/8 and related section 8 programs. It balances the

ability of the targeted tenant population (i.e., low and very low

income persons) to pay a security deposit with the Borrower's need for

an adequate resource to offset damages caused to the unit. (HUD notes

that the family's security deposit [[Page 2662]] balance is not the

only resource available to a Borrower to recover sums owed. Under the

final rule (Sec. 885.635(c)), if the family's security deposit is

insufficient to reimburse the Borrower for any unpaid rent, or other

amount which the family owes under the lease for an assisted unit, the

Borrower may claim reimbursement from HUD in an amount not to exceed

the lesser of the amount owed to the Borrower or one month's contract

rent, minus the amount of the family's security deposit.) The $50

minimum has been retained in the final rule.

Adjustment of Rents (Sec. 885.640). Section 885.640 governs the

adjustment of contract rents. Adjustments are made by one of two

methods. Generally, HAP contracts that were entered into prior to 1981

provide for adjustments using an automatic annual adjustment factor and

special additional adjustments. Contracts executed or amended after

1981 provided for adjustment based on a HUD-approved budget.

One commenter encouraged HUD to allow, within the rent adjustment,

an annual adjustment for utility costs based on the projected costs

established by utility companies, rather than the past years' actual

expenditures. Contrary to the commenter's assumption, rent adjustments

based on the HUD-approved budget may not necessarily be performed as

frequently as annually. However, when such adjustments are performed

HUD does consider the actual utility rates that are in effect and

approved utility rate increases that will be implemented during the

year. HUD does not believe it is necessary to revise the rule to

accommodate the commenter's suggestion.

Where the HAP contract provides that rent adjustments will be based

on the application of an annual adjustment factor the procedures are

different. The Department considers the average annual cost of

utilities for the prior year in determining the section 8 annual

adjustment factor. If the annual adjustment factor is insufficient to

cover the cost of an approved increase, the Borrower may request HUD to

approve a special adjustment under Sec. 885.640(a)(2)(ii).

Other Matters

A Finding of No Significant Impact with respect to the environment

has been made in accordance with HUD regulations in 24 CFR Part 50,

which implement section 102(2)(C) of the National Environmental Policy

Act of 1969, 42 U.S.C. 4332. The Finding of No Significant Impact is

available for public inspection during regular business hours in the

Office of the General Counsel, Rules Docket Clerk, Room 10276, 451

Seventh Street, S.W., Washington, D.C. 20410-0500.

Under 5 U.S.C. 605(b) (the Regulatory Flexibility Act), the

Undersigned certifies that this rule does not have a significant

economic impact on a substantial number of small entities. The contract

and management provisions incorporated in this rulemaking generally

reflect existing HUD policies already guiding operators of section 202/

8 projects. This proceeding does not change the goals toward which

program activities are directed. The rule's effect both on small and

large entities should be minor.

The General Counsel, as the Designated Official under section 6(a)

of Executive Order No. 12611--Federalism, has determined that the final

rule does not involve the preemption of State law by Federal statute or

regulation and does not have Federalism implications. The rule reflects

existing HUD policies guiding non-profit organizations operating

section 202/8 projects. The rule, to the maximum extent possible,

defers to State and local policies (see e.g., Secs. 885.635(b)(1), (3)

and (5)).

This rule was listed as sequence number 1805 in the Department's

Semiannual Agenda of Regulations published November 14, 1994 (59 FR

57632, 57657) under Executive Order 12866 and the Regulatory

Flexibility Act.

List of Subjects

24 CFR Part 813

Grant programs--housing and community development, Rent subsidies,

Reporting and recordkeeping requirements, Utilities.

24 CFR Part 885

Aged, Individuals with disabilities, Loan programs--housing and

community development, Low and moderate income housing, Reporting and

recordkeeping requirements.

Accordingly, in title 24 of the Code of Federal Regulations, parts

813 and 885, are amended as follows:

PART 813--DEFINITION OF INCOME, INCOME LIMITS, RENT AND

REEXAMINATION OF FAMILY INCOME FOR THE SECTION 8 HOUSING ASSISTANCE

PAYMENTS PROGRAMS AND RELATED PROGRAMS

1. The authority citation for 24 CFR part 813 continues to read as

follows:

Authority: 42 U.S.C. 1437a, 1437c, 1437f, 1437n and 3535(d).

2. In Sec. 813.109, the section heading and paragraph (a), is

revised to read as follows:

Sec. 813.109 Initial determination, verification, and reexamination of

Family income and composition.

(a) Responsibility for initial determination and reexamination. The

Owner or PHA shall be responsible for determination of eligibility for

admission, for determination of Annual Income, Adjusted Income and

Total Tenant Payment, and for reexamination of Family income and

composition at least annually, as provided in pertinent program

regulations and handbooks (see, e.g., 24 CFR part 880, subpart F; 24

CFR part 881, subpart F; 24 CFR part 882, subparts B and E; 24 CFR part

883, subpart G; 24 CFR part 884, subpart B; 24 CFR part 885, subparts B

and C; 24 CFR part 886, subparts A and C; 24 CFR part 887, subpart H;

and 24 CFR parts 889 and 890.). As used in this part, the ``effective

date'' of an examination or reexamination refers to:

(1) In the case of an examination for admission, the effective date

of initial occupancy; and

(2) In the case of a reexamination of an existing tenant, the

effective date of the redetermined housing assistance payment with

respect to the Housing Voucher program (part 887 of this chapter) and

the effective date of the redetermined Total Tenant Payment in all

other cases.

* * * * *

PART 885--LOANS FOR HOUSING FOR THE ELDERLY OR HANDICAPPED

3. The authority citation for 24 CFR part 885 continues to read as

follows:

Authority: 12 U.S.C. 1701q; 42 U.S.C. 1437f and 3535(d).

4. In Sec. 885.5, the definition of ``Section 8 Program'', is

revised to read as follows:

Sec. 885.5 Definitions.

* * * * *

Section 8 Program means the housing assistance payments program

which implements section 8 of the United States Housing Act of 1937 (42

U.S.C. 1437f note).

* * * * *

5. In subpart B, Sec. 885.200 is redesignated as Sec. 885.203, and

a new Sec. 885.200 is added, to read as follows:

Sec. 885.200 Definitions applicable to Subpart B.

As used in this subpart B:

Agreement to enter into housing assistance payments contract means

the agreement between the Borrower and [[Page 2663]] HUD which provides

that, upon satisfactory completion of the project in accordance with

the HUD-approved final proposal, HUD will enter into the HAP contract

with the Borrower.

Annual income is defined in part 813 of this chapter.

Assisted unit means a dwelling unit eligible for assistance under a

HAP contract.

Contract rent means the total amount of rent specified in the HAP

contract as payable by HUD and the tenant to the Borrower for an

assisted unit.

Family (eligible family) means an elderly or handicapped family (as

defined in this section) that meets the project occupancy requirements

approved by HUD and, if the family occupies an assisted unit, meets the

requirements described in part 813 of this chapter.

Gross rent is defined in part 813 of this chapter.

HAP contract (housing assistance payments contract) means the

contract entered into by the Borrower and HUD setting forth the rights

and duties of the parties with respect to the project and the payments

under the HAP contract.

Housing assistance payment means the payment made by HUD to the

Borrower for assisted units as provided in the HAP contract. The

payment is the difference between the contract rent and the tenant

rent. An additional payment is made to a family occupying an assisted

unit when the utility allowance is greater than the total tenant

payment. A housing assistance payment, known as a ``vacancy payment'',

may be made to the Borrower when an assisted unit is vacant, in

accordance with the terms of the HAP contract.

Project account means a specifically identified and segregated

account for each project which is established in accordance with

Sec. 885.510(b) out of the amounts by which the maximum annual

commitment exceeds the amount actually paid out under the HAP contract

each year.

Project occupancy requirements means eligible populations to be

served under the Section 202 program are qualified individuals or

families whose head of household or spouse is elderly, physically

handicapped, developmentally disabled or chronically mentally ill.

Projects are designed to meet the special needs of the particular

tenant population which the Borrower was selected to serve. Individuals

from one eligible group may not be accepted for occupancy in a project

designed for a different tenant group. However, a Sponsor can propose

to house eligible tenant groups other than the one it was selected to

serve, but must apply to the HUD Field Office for permission to do so,

based on a plan which demonstrates that it can adequately serve the

proposed tenant group. Upon review and recommendation by the Field

Office, HUD Headquarters will approve or disapprove the request.

Rent, in the case of a unit in a cooperative project, means the

carrying charges payable to the cooperative with respect to occupancy

of the unit.

Tenant rent means the monthly amount defined in, and determined in

accordance with part 813 of this chapter.

Total tenant payment means the monthly amount defined in, and

determined in accordance with part 813 of this chapter.

Utility allowance is defined in part 813 of this chapter and is

determined or approved by HUD.

Utility reimbursement is defined in part 813 of this chapter.

Vacancy payment means the housing assistance payment made to the

Borrower by HUD for a vacant assisted unit if certain conditions are

fulfilled, as provided in the HAP contract. The amount of the vacancy

payment varies with the length of the vacancy period and is less after

the first 60 days of any vacancy.

6. In Sec. 885.210, paragraph (b)(5) is revised, to read as

follows:

Sec. 885.210 Contents of applications.

* * * * *

(b) * * *

(5) A narrative description of the anticipated occupancy of the

project. The Borrower must propose project occupancy requirements that

limit occupancy to the elderly and/or handicapped.

* * * * *

7. In Sec. 885.425, the section heading is revised; paragraph (b)

is removed; paragraphs (c), (d), (e) and (f) are redesignated as

paragraphs (b), (c), (d) and (e), respectively; to read as follows:

Sec. 885.425 Completion of project, cost certification and HUD

approvals.

* * * * *

8. Sections 885.500 through 885.655 are added to subpart B, to read

as follows:

Sec. 885.500 HAP contract.

(a) HAP contract. The housing assistance payments contract sets

forth rights and duties of the Borrower and HUD with respect to the

project and the housing assistance payments.

(b) HAP contract execution. (1) Upon satisfactory completion of the

project, the Borrower and HUD shall execute the HAP contract on the

form prescribed by HUD.

(2) The effective date of the HAP contract may be earlier than the

date of execution, but no earlier than the date of HUD's issuance of

the permission to occupy.

(3) If the project is completed in stages, the procedures of

paragraph (b) of this section shall apply to each stage.

(c) Housing assistance payments to owners under the HAP contract.

The housing assistance payments made under the HAP contract are:

(1) Payments to the Borrower to assist eligible families leasing

assisted units. The amount of the housing assistance payment made to

the Borrower for an assisted unit leased to an eligible family is equal

to the difference between the contract rent for the unit and the tenant

rent payable by the family.

(2) Payments to the Borrower for vacant assisted units (``vacancy

payments''). The amount of and conditions for vacancy payments are

described in Sec. 885.650. The housing assistance payments are made

monthly by HUD upon proper requisition by the Borrower, except payments

for vacancies of more than 60 days, which are made semiannually by HUD

upon requisition by the Borrower.

(d) Payment of utility reimbursement. Where applicable, a utility

reimbursement will be paid to a family occupying an assisted unit as an

additional housing assistance payment. The HAP contract will provide

that the Borrower will make this payment on behalf of HUD. Funds will

be paid to the Borrower in trust solely for the purpose of making the

additional payment. The Borrower may pay the utility reimbursement

jointly to the family and the utility company, or, if the family and

utility company consent, directly to the utility company.

Sec. 885.505 Term of HAP contract.

The term of the HAP contract for assisted units shall be 20 years.

If the project is completed in stages, the term of the HAP contract for

assisted units in each stage shall be 20 years. The term of the HAP

contract for all assisted units in all stages of a project shall not

exceed 22 years.

Sec. 885.510 Maximum annual commitment and project account.

(a) Maximum annual commitment. The maximum annual amount that may

be committed under the HAP contract is the total of the contract rents

and utility allowances for all assisted units in the project.

(b) Project account. (1) HUD will establish and maintain a

specifically identified and segregated project account for each

project. The project [[Page 2664]] account will be established out of

the amounts by which the maximum annual commitment exceeds the amount

actually paid out under the HAP contract each year. HUD will make

payments from this account for housing assistance payments as needed to

cover increases in contract rents or decreases in tenant income and

other payments for costs specifically approved by the Secretary.

(2) If the HUD-approved estimate of required annual payments under

the HAP contract for a fiscal year exceeds the maximum annual

commitment for that fiscal year plus the current balance in the project

account, HUD will, within a reasonable time, take such steps authorized

by section 8(c)(6) of the United States Housing Act of 1937 (42 U.S.C.

1437f note), as may be necessary, to assure that payments under the HAP

contract will be adequate to cover increases in contract rents and

decreases in tenant income.

Sec. 885.515 Leasing to eligible families.

(a) Availability of assisted units for occupancy by eligible

families. (1) During the term of the HAP contract, a Borrower shall

make available for occupancy by eligible families the total number of

units for which assistance is committed under the HAP contract. For

purposes of this section, making units available for occupancy by

eligible families means that the Borrower:

(i) Is conducting marketing in accordance with Sec. 885.600(a);

(ii) Has leased or is making good faith efforts to lease the units

to eligible and otherwise acceptable families, including taking all

feasible actions to fill vacancies by renting to such families;

(iii) Has not rejected any such applicant family except for reasons

acceptable to HUD.

(2) If the Borrower is temporarily unable to lease all units for

which assistance is committed under the HAP contract to eligible

families, one or more units may, with the prior approval of HUD, be

leased to otherwise eligible families that do not meet the income

eligibility requirements of part 813. Failure on the part of the

Borrower to comply with these requirements is a violation of the HAP

contract and grounds for all available legal remedies, including an

action for specific performance of the HAP contract, suspension or

debarment from HUD programs, and reduction of the number of units under

the HAP contract as set forth in paragraph (b) of this section.

(b) Reduction of number of units covered by the HAP contract. HUD

may reduce the number of units covered by the HAP contract to the

number of units available for occupancy by eligible families if:

(1) The Borrower fails to comply with the requirements of paragraph

(a) of this section; or

(2) Notwithstanding any prior approval by HUD, HUD determines that

the inability to lease units to eligible families is not a temporary

problem.

(c) Restoration. HUD will agree to an amendment of the HAP contract

to provide for subsequent restoration of any reduction made under

paragraph (b) of this section if:

(1) HUD determines that the restoration is justified by demand;

(2) The Borrower otherwise has a record of compliance with the

Borrower's obligations under the HAP contract; and

(3) Contract and budget authority is available.

(d) Applicability. In accordance with section 555 of the Cranston-

Gonzalez National Affordable Housing Act of 1990, paragraphs (a) and

(b) of this section apply to all contracts. An owner who had leased an

assisted unit to an ineligible family consistent with the regulations

in effect at the time will continue to lease the unit to that family.

However, the owner must make the unit available for occupancy by an

eligible family when the ineligible family vacates the unit.

(e) Occupancy by families that are not elderly or handicapped. HUD

may permit units in the project to be leased to other than elderly or

handicapped families if:

(1) The Borrower has made reasonable efforts to lease assisted and

unassisted units to eligible families;

(2) The Borrower has been granted HUD approval under paragraph (a)

of this section; and

(3) The Borrower is temporarily unable to achieve or maintain a

level of occupancy sufficient to prevent financial default and

foreclosure under the section 202 loan documents. HUD approval under

paragraph (e)(3) of this section will be of limited duration. HUD may

impose terms and conditions to this approval that are consistent with

program objectives and necessary to protect its interest in the section

202 loan.

Sec. 885.520 HAP contract administration.

HUD is responsible for the administration of the HAP Contract.

Sec. 885.525 Default by Borrower.

(a) HAP contract provisions. The HAP contract will provide:

(1) That if HUD determines that the Borrower is in default under

the HAP contract, HUD will notify the Borrower of the actions required

to be taken to cure the default and of the remedies to be applied by

HUD including an action for specific performance under the HAP

contract, reduction or suspension of housing assistance payments and

recovery of overpayments, where appropriate; and

(2) That if the Borrower fails to cure the default, HUD has the

right to terminate the HAP contract or to take other corrective action.

(b) Loan provisions. Additional provisions governing default under

the section 202 loan are included in the regulatory agreement and other

loan documents described in Sec. 885.415.

Sec. 885.530 Notice upon HAP contract expiration.

(a) Notice required. The HAP contract will provide that the

Borrower will, at least one year before the end of the HAP contract

term, notify each family leasing an assisted unit of any increase in

the amount the family will be required to pay as rent as a result of

the expiration.

(b) Service requirements. The notice under paragraph (a) of this

section shall be accomplished by sending a letter by first class mail,

properly stamped and addressed, to the family at its address at the

project, with a proper return address; and serving a copy of the notice

on any adult person answering the door at the leased dwelling unit, or

if no adult responds, by placing the notice under or through the door,

if possible, or else by affixing the notice to the door. Service shall

not be considered to be effective until both required notices have been

accomplished. The date on which the notice shall be considered to be

received by the family shall be the date on which the Borrower mails

the first class letter provided for in paragraph (b) of this section,

or the date on which the notice provided for in paragraph (b) of this

section is properly given, whichever is later.

(c) Contents of notice. The notice shall advise each affected

family that, after the expiration date of the HAP contract, the family

will be required to bear the entire cost of the rent and that the

Borrower may, subject to requirements and restrictions contained in the

regulatory agreement, the lease, and State or local law, change the

rent. The notice also shall state:

(1) The actual (if known) or the estimated rent that will be

charged following the expiration of the HAP contract;

(2) The difference between the new rent and the total tenant

payment toward rent under the HAP contract; and [[Page 2665]]

(3) The date the HAP contract will expire.

(d) Certification to HUD. The Borrower shall give HUD a

certification that families have been notified in accordance with this

section and shall attach to the certification an example of the text of

the notice.

(e) Applicability. This section applies to all HAP contracts

entered into under an agreement to enter into a housing assistance

payments contract executed on or after October 1, 1981, or entered into

under such an agreement executed before October 1, 1981 but renewed or

amended after February 9, 1995.

(Approved by the Office of Management and Budget under control

number 2502-0371).

Sec. 885.535 HAP contract extension or renewal.

Upon expiration of the term of the HAP contract, HUD and the

Borrower may agree (subject to available funds) to extend the term of

the HAP contract or to renew the HAP contract. The number of assisted

units under the extended or renewed HAP contract shall equal the number

of assisted units under the original HAP contract, except that--

(a) HUD and the Borrower may agree to reduce the number of assisted

units by the number of assisted units that are not occupied by eligible

families at the time of the extension or renewal; and

(b) HUD and the Borrower may agree to permit reductions in the

number of assisted units during the term of the extended or renewed HAP

contract as assisted units are vacated by eligible families. Nothing in

this section shall prohibit HUD from reducing the number of units

covered under the extended or renewed HAP contract in accordance with

Sec. 885.515(b).

Sec. 885.600 Responsibilities of Borrower.

(a) Marketing. (1) The Borrower must commence and continue diligent

marketing activities not later than 90 days before the anticipated date

of availability for occupancy of the first unit of the project. Market

activities shall include the provision of notices of availability of

housing under the program to operators of temporary housing for the

homeless in the same housing market.

(2) Marketing must be done in accordance with the HUD-approved

affirmative fair housing marketing plan and all Federal, State or local

fair housing and equal opportunity requirements. The purpose of the

plan and requirements is to achieve a condition in which eligible

families of similar income levels in the same housing market have a

like range of housing choices available to them regardless of

discriminatory considerations, such as their race, color, creed,

religion, familial status, disability, sex or national origin.

Marketing must also be done in accordance with the communication and

notice requirements of Section 504 at 24 CFR 8.6 and 24 CFR 8.54, i.e.,

TDD requirements for all housing providers and methods to reach those

with speech, visual and hearing impairments.

(3) At the time of HAP contract execution, the Borrower must submit

to HUD a list of leased and unleased assisted units, with a

justification for the unleased units, in order to qualify for vacancy

payments for the unleased units.

(b) Management and maintenance. The Borrower is responsible for all

management functions. These functions include selection and admission

of tenants, required reexaminations of incomes for families occupying

assisted units, collection of rents, termination of tenancy and

eviction, and all repair and maintenance functions (including ordinary

and extraordinary maintenance and replacement of capital items). All

functions must be performed in compliance with equal opportunity

requirements.

(c) Contracting for services. (1) With HUD approval, the Borrower

may contract with a private or public entity for performance of the

services or duties required in paragraphs (a) and (b) of this section.

However, such an arrangement does not relieve the Borrower of

responsibility for these services and duties. All such contracts are

subject to the restrictions governing prohibited contractual

relationships described in Sec. 885.5. (These prohibitions do not

extend to management contracts entered into by the Borrower with the

sponsor or its non-profit affiliate).

(2) Consistent with the objectives of Executive Order 11625 (3 CFR,

1971-1975 Comp., p. 616, unless otherwise noted), Executive Order 12432

(3 CFR, 1983 Comp., p. 198, unless otherwise noted), and Executive

Order 12138 (3 CFR, 1979 Comp., p. 393, unless otherwise noted), the

Borrower will promote awareness and participation of minority and

women's business enterprises in contracting and procurement activities.

(d) Submission of financial and operating statements. The Borrower

must submit to HUD:

(1) Within 60 days after the end of each fiscal year of project

operations, financial statements for the project audited by an

independent public accountant and in the form required by HUD; and

(2) Other statements regarding project operation, financial

conditions and occupancy as HUD may require to administer the HAP

contract and to monitor project operations.

(e) Use of project funds. The Borrower shall maintain a separate

project fund account in a depository or depositories which are members

of the Federal Deposit Insurance Corporation or National Credit Union

Share Insurance Fund and shall deposit all rents, charges, income and

revenues arising from project operation or ownership to this account.

All project funds are to be deposited in Federally-insured accounts.

All balances shall be fully insured at all times, to the maximum extent

possible. Project funds must be used for the operation of the project

(including required insurance coverage), to make required principal and

interest payments on the section 202 loan, and to make required

deposits to the replacement reserve under Sec. 885.605, in accordance

with a HUD-approved budget. Any project funds in the project funds

account (including earned interest) following the expiration of the

fiscal year shall be deposited in a Federally-insured residual receipts

account within 60 days following the end of the fiscal year.

Withdrawals from this account may be made only for project purposes and

with the approval of HUD. If there are funds remaining in the residual

receipts account when the mortgage is satisfied, such funds shall be

returned to HUD.

(f) Reports. The Borrower shall submit such reports as HUD may

prescribe to demonstrate compliance with applicable civil rights and

equal opportunity requirements.

(Approved by the Office of Management and Budget under control

number 2502-0371).

Sec. 885.605 Replacement reserve.

(a) Establishment of reserve. The Borrower shall establish and

maintain a replacement reserve to aid in funding extraordinary

maintenance, and repair and replacement of capital items.

(b) Deposits to reserve. The Borrower shall make monthly deposits

to the replacement reserve in an amount determined by HUD.

(c) Level of reserve. The reserve must be built up to and

maintained at a level determined by HUD to be sufficient to meet

projected requirements. Should the reserve reach that level, the amount

of the deposit to the reserve may be reduced with the approval of HUD.

(d) Administration of reserve. Replacement reserve funds must be

deposited with HUD or in a Federally-insured depository in an interest-

bearing account (s) whose balances are [[Page 2666]] fully insured at

all times. All earnings including interest on the reserve must be added

to the reserve. Funds may be drawn from the reserve and used only in

accordance with HUD guidelines and with the approval of, or as directed

by, HUD.

Sec. 885.610 Selection and admission of tenants.

(a) Written tenant selection procedures. The Owner shall adopt

written tenant selection procedures which ensure nondiscrimination in

the selection of tenants and that are consistent with the purpose of

improving housing opportunities for very low-income elderly or

handicapped persons; and reasonably related to program eligibility and

an applicant's ability to perform the obligations of the lease. The

Owner must comply with the following nondiscrimination authorities:

section 504 of the Rehabilitation Act of 1973 (29 U.S.C. 794) and the

implementing regulations at 24 CFR part 8; the Fair Housing Act (42

U.S.C. 3600-3619) and the implementing regulations at 24 CFR parts 100,

108, 109, and 110; Title VI of the Civil Rights Act of 1964 (42 U.S.C.

2000d) and the implementing regulations at 24 CFR part 1; section 3 of

the Housing and Urban Development Act of 1968 (12 U.S.C. 1701u) and the

implementing regulations at 24 CFR part 135; the Age Discrimination Act

of 1975 (42 U.S.C. 6101-6107) and the implementing regulations at 24

CFR part 146; Executive Order 11246 (as amended), 3 CFR, 1964-1965

Comp., p. 339, and the implementing regulations at 41 CFR Chapter 60;

Executive Order 11063 (Equal Opportunity in Housing), 3 CFR, 1959-1963

Comp., p. 652 and the implementing regulations at 24 CFR part 107; the

Americans with Disabilities Act (42 U.S.C. 12101 et seq.) to the extent

applicable; and other applicable Federal, State and local laws

prohibiting discrimination and promoting equal opportunity. While local

residency requirements are prohibited, local residency preferences may

be applied in selecting tenants only to the extent that they are not

inconsistent with affirmative fair housing marketing objectives and the

Owner's HUD-approved affirmative fair housing marketing plan.

Preferences may not be based on the length of time the applicant has

resided in the jurisdiction. With respect to any residency preference,

persons expected to reside in the community as a result of current or

planned employment will be treated as residents. Owners shall promptly

notify in writing any rejected applicant of the grounds for any

rejection. Additionally, owners shall maintain a written, chronological

waiting list showing the name, race, gender, ethnicity and date of each

person applying for the program.

(b) Application for admission. The Borrower must accept

applications for admission to the project in the form prescribed by HUD

and is obligated to confirm all information provided by the applicant

families on the application. Applicant families must be requested to

complete a release of information consent for verification of

information. Applicants applying for assisted units must complete a

certification of eligibility as part of the application for admission.

Applicant families must meet the disclosure and verification

requirements for Social Security Numbers, as provided by 24 CFR part

750. Applicant families must sign and submit consent forms for the

obtaining of wage and claim information from State Wage Information

Collection Agencies, as provided by 24 CFR part 760. Both the Borrower

and the applicant must complete and sign the application for admission.

On request, the Borrower must furnish copies of all applications for

admission to HUD.

(c) Determination of eligibility and selection of tenants. The

Borrower is responsible for determining whether applicants are eligible

for admission and for the selection of families. To be eligible for

admission, an applicant must be an elderly or handicapped family as

defined in Sec. 885.5, must meet any project occupancy requirements

approved by HUD under Sec. 885.225(a)(1), must meet the disclosure and

verification requirements for Social Security Numbers, as provided by

24 CFR part 750), must sign and submit consent forms for obtaining of

wage and claim information from State Wage Information Collection

Agencies, as provided by 24 CFR part 760, and must, if applying for an

assisted unit, be eligible for admission under part 813 of this

chapter.

(d) Unit assignment. If the Borrower determines that the family is

eligible and is otherwise acceptable and units are available, the

Borrower will assign the family a unit. The Borrower will assign the

family a unit of the appropriate size in accordance with HUD's general

occupancy guidelines. If no suitable unit is available, the Borrower

will place the family on a waiting list for the project and notify the

family of when a suitable unit may become available. If the waiting

list is so long that the applicant would not be likely to be admitted

for the next 12 months, the Borrower may advise the applicant that no

additional applications for admission are being considered for that

reason, except that the Borrower may not refuse to place an applicant

on the waiting list if the applicant is otherwise eligible for

assistance and claims that he or she qualifies for a Federal preference

as provided in Sec. 885.427.

(e) Ineligibility determination. If the Borrower determines that an

applicant is ineligible for admission or the Borrower is not selecting

the applicant for other reasons, the Borrower will promptly notify the

applicant in writing of the determination, the reasons for the

determination, and that the applicant has a right to request a meeting

with the Borrower or managing agent to review the rejection, in

accordance with HUD requirements. The review, if requested, may not be

conducted by a member of the Borrower's staff who made the initial

decision to reject the applicant. The applicant may also exercise other

rights (e.g., rights granted under Federal, State or local civil rights

laws) if the applicant believes he or she is being discriminated

against on a prohibited basis. The informal review provisions for the

denial of a Federal preference are provided at Sec. 880.613(h) of this

chapter.

(f) Records. Records on applicants and approved eligible families,

which provide racial, ethnic, gender, handicap status, and place of

previous residency data required by HUD, must be retained for three

years.

(g) Reexamination of family income and composition--(1) Regular

reexaminations. The Borrower must reexamine the income and composition

of the family at least every 12 months. Upon verification of the

information, the Borrower shall make appropriate adjustments in the

total tenant payment in accordance with part 813 of this chapter and

determine whether the family's unit size is still appropriate. The

Borrower must adjust tenant rent and the housing assistance payment and

must carry out any unit transfer in accordance with the administrative

instructions issued by HUD. At the time of reexamination under

paragraph (g)(1) of this section, the Borrower must require the family

to meet the disclosure and verification requirements for Social

Security Numbers, as provided by 24 CFR part 750. For requirements

regarding the signing and submitting of consent forms by families for

obtaining of wage and claim information from State Wage Information

Collection Agencies, see 24 CFR part 760.

(2) Interim reexaminations. The family must comply with the

provisions in its lease regarding interim reporting of changes in

income. If the Borrower receives information concerning a

[[Page 2667]] change in the family's income or other circumstances

between regularly scheduled reexaminations, the Borrower must consult

with the family and make any adjustments determined to be appropriate.

See 24 CFR 750.10(d)(2)(i) for the requirements for the disclosure and

verification of Social Security Numbers at interim reexaminations

involving new family members. For requirements regarding the signing

and submitting of consent forms by families for the obtaining of wage

and claim information from State wage information collection agencies,

see 24 CFR part 760. Any change in the family's income or other

circumstances that results in an adjustment in the total tenant

payment, tenant rent and housing assistance payment must be verified.

(3) Continuation of housing assistance payments. (i) A family shall

remain eligible for housing assistance payments until the total tenant

payment equals or exceeds the gross rent. The termination of subsidy

eligibility will not affect the family's other rights under its lease.

Housing assistance payments may be resumed if, as a result of changes

in income, rent or other relevant circumstances during the term of the

HAP contract, the family meets the income eligibility requirements of

part 813 of this chapter and housing assistance is available for the

unit under the terms of the HAP contract. The family will not be

required to establish its eligibility for admission to the project

under the remaining requirements of paragraph (c) of this section.

(ii) A family's eligibility for housing assistance payments may be

terminated in accordance with HUD requirements for such reasons as

failure to submit requested verification information, including

information related to disclosure and verification of Social Security

Numbers (as provided by 24 CFR part 750) or failure to sign and submit

consent forms for the obtaining of wage and claim information from

State wage information collection agencies (as provided by 24 CFR part

760).

(Approved by the Office of Management and Budget under control

number 2502-0371).

Sec. 885.615 Obligations of the family.

(a) Requirements. The family shall:

(1) Pay amounts due under the lease directly to the Borrower.

(2) Supply such certification, release of information, consent,

complete forms or documentation as the Borrower or HUD determines

necessary, including information and documentation relating to the

disclosure and verification of Social Security Numbers, as provided by

24 CFR part 750, and the signing and submission of consent forms for

the obtaining of wage and claim information from State Wage Information

Collection Agencies, as provided by 24 CFR part 760;

(3) Allow the Borrower to inspect the dwelling unit at reasonable

times and after reasonable notice;

(4) Notify the Borrower before vacating the dwelling unit; and

(5) Use the dwelling unit solely for residence by the family, and

as the family's principal place of residence.

(b) Prohibitions. The family shall not:

(1) Assign the lease or transfer the unit; or

(2) Occupy, or receive assistance for the occupancy of, a unit

governed under this part while occupying, or receiving assistance for

occupancy of, another unit assisted under any Federal housing

assistance program, including any section 8 program.

(Approved by the Office of Management and Budget under control

number 2502-0371).

Sec. 885.620 Overcrowded and underoccupied units.

If the Borrower determines that because of change in family size, a

unit is smaller than appropriate for the eligible family to which it is

leased, or that the unit is larger than appropriate, housing assistance

payments with respect to the unit will not be reduced or terminated

until the eligible family has been relocated to an appropriate

alternate unit. If possible, the Borrower will, as promptly as

possible, offer the family an appropriate alternate unit. The Borrower

may receive vacancy payments for the vacated unit if the Borrower

complies with the requirements of Sec. 885.650.

Sec. 885.625 Lease requirements.

(a) Term of lease. The term of the lease may not be less than one

year. Unless the lease has been terminated by appropriate action, upon

expiration of the lease term, the family and Borrower may execute a new

lease for a term not less than one year, or may take no action. If no

action is taken, the lease will automatically be renewed for successive

terms of one month.

(b) Termination by the family. All leases may contain a provision

that permits the family to terminate the lease upon 30 days advance

notice. A lease for a term that exceeds one year must contain such

provision.

(c) Form. The Borrower shall use the lease form prescribed by HUD.

In addition to required provisions in the lease form, the Borrower may

include a provision in the lease permitting the Borrower to enter the

leased premises, at any time, without advance notice where there is

reasonable cause to believe that an emergency exists or that health or

safety of a family member is endangered.

Sec. 885.630 Termination of tenancy and modification of lease.

The provisions of part 247 of this title apply to all decisions by

a Borrower to terminate the tenancy or modify the lease of a family

residing in a unit.

Sec. 885.635 Security deposits.

(a) Collection of security deposit. At the time of the initial

execution of the lease, the Borrower:

(1) Will require each family occupying a unit to pay a security

deposit in an amount equal to one month's total tenant payment or $50,

whichever is greater; and

(2) May require each family occupying an unassisted unit to pay a

security deposit equal to one month's rent payable by the family. The

family is expected to pay the security deposit from its own resources

and other available public or private resources. The Borrower may

collect the security deposit on an installment basis.

(b) Security deposit provisions applicable to assisted and

unassisted units.--(1) Administration of security deposit. The Borrower

must place the security deposits in a segregated interest-bearing

account. The Borrower shall maintain a record of the amount in this

account that is attributable to each family in residence in the

project. Annually for all families, and when computing the amount

available for disbursement under paragraph (b)(3) of this section, the

Borrower shall allocate to the family's balance, the interest accrued

on the balance during the year. Unless prohibited by State or local

law, the Borrower may deduct for the family, from the accrued interest

for the year, the administrative cost of computing the allocation to

the family's balance. The amount of the administrative cost adjustment

shall not exceed the accrued interest allocated to the family's balance

for the year. The amount of the segregated, interest-bearing account

maintained by the Borrower must at all times equal the total amount

collected from the families then in occupancy plus any accrued interest

and less allowable administrative cost adjustments. The Borrower must

comply with any applicable State and local laws concerning interest

payments on security deposits.

(2) Family notification requirement. In order to be considered for

the refund of the security deposit, a family must [[Page 2668]] provide

the Borrower with a forwarding address or arrange to pick up the

refund.

(3) Use of security deposit. The Borrower, subject to State and

local law and the requirements of paragraph (b)(3) of this section, may

use the family's security deposit balance as reimbursement for any

unpaid family contribution or other amount which the family owes under

the lease. Within 30 days (or shorter time if required by State or

local law) after receiving notification under paragraph (b)(2) of this

section the Borrower must:

(i) Refund to a family which does not owe any amount under the

lease the full amount of the family's security deposit balance;

(ii) Provide to a family owing under the lease a list itemizing

each amount, along with a statement of the family's rights under State

and local law. If the amount which the Borrower claims is owed by the

family is less than the amount of the family's security deposit

balance, the Borrower must refund the excess balance to the family. If

the Borrower fails to provide the list, the family will be entitled to

the refund of the full amount of the family's security deposit balance.

(4) Disagreements. If a disagreement arises concerning

reimbursement of the security deposit, the family will have the right

to present objections to the Borrower in an informal meeting. The

Borrower must keep a record of any disagreements and meetings in a

tenant file for inspection by HUD. The procedures of paragraph (b)(4)

of this section do not preclude the family from exercising its rights

under State or local law.

(5) Decedent's interest in security deposit. Upon the death of a

member of a family, the decedent's interest, if any, in the security

deposit will be governed by State or local law.

(c) Reimbursement by HUD for assisted units. If the family's

security deposit balance is insufficient to reimburse the Borrower for

any unpaid amount which the family owes under the lease for an assisted

unit and the Borrower has provided the family with the list required by

paragraph (b)(3)(ii) of this section, the Borrower may claim

reimbursement from HUD for an amount not to exceed the lesser of:

(1) The amount owed the Borrower; or

(2) One month's contract rent, minus the amount of the family's

security deposit balance. Any reimbursement under this section will be

applied first toward any unpaid tenant rent due under the lease. No

reimbursement may be claimed for unpaid rent for the period after

termination of the tenancy. The Borrower may be eligible for vacancy

payments following a vacancy in accordance with the requirements of

Sec. 885.650.

(Approved by the Office of Management and Budget under control

number 2502-0371).

Sec. 885.640 Adjustment of rents.

(a) Contract rents.--(1) Adjustment based on approved budget. If

the HAP contract provides, or has been amended to provide, that

contract rents will be adjusted based upon a HUD-approved budget, HUD

will calculate contract rent adjustments based on the sum of the

project's operating costs and debt service (as calculated by HUD), with

adjustments for vacancies, the project's non-rental income, and other

factors that HUD deems appropriate. The calculation will be made on the

basis of information provided by the Borrower on a form acceptable to

the Secretary. The automatic adjustment factor described in part 888 of

this chapter is not used to adjust contract rents under paragraph

(a)(1) of this section, except to the extent that the amount of the

replacement reserve deposit is adjusted under Sec. 880.602 of this

chapter.

(2) Annual and special adjustments. If the HAP contract provides

that contract rents will be adjusted based on the application of an

automatic adjustment factor and by special additional adjustments:

(i) Consistent with the HAP contact, contract rents may be adjusted

in accordance with part 888 of this chapter;

(ii) Special additional adjustments will be granted, to the extent

determined necessary by HUD, to reflect increases in the actual and

necessary expenses of owning and maintaining the assisted units which

have resulted from substantial general increases in real property

taxes, assessments, utility rates or similar costs (i.e., assessments

and utilities not covered by regulated rates), and which are not

adequately compensated for by an annual adjustment. The Borrower must

submit to HUD required supporting data, financial statements and

certifications for the special additional adjustment.

(b) Rent for unassisted units. The rent payable by families

occupying units that are not assisted under the HAP contract shall be

equal to the contract rent computed under paragraph (a) of this

section.

(Approved by the Office of Management and Budget under control

number 2502-0371).

Sec. 885.645 Adjustment of utility allowances.

In connection with adjustments of contract rents as provided in

Sec. 885.640(a), the Borrower must submit an analysis of any project's

utility allowances. Such data as changes in utility rates and other

facts affecting utility consumption should be provided as part of this

analysis to permit appropriate adjustments in the utility allowances

for assisted units. In addition, when approval of a utility rate change

would result in a cumulative increase of 10 percent or more in the most

recently approved utility allowances, the Borrower must advise HUD and

request approval of new utility allowances. Whenever a utility

allowance for an assisted unit is adjusted, the Borrower will promptly

notify affected families and make a corresponding adjustment of the

tenant rent and the amount of the housing assistance payment.

(Approved by the Office of Management and Budget under control

number 2502-0371).

Sec. 885.650 Conditions for receipt of vacancy payments for assisted

units.

(a) General. Vacancy payments under the HAP contract will not be

made unless the conditions for receipt of these housing assistance

payments set forth in this section are fulfilled.

(b) Vacancies during rent-up. For each unit that is not leased as

of the effective date of the HAP contract, the Borrower is entitled to

vacancy payments in the amount of 80 percent of the contract rent for

the first 60 days of vacancy, if the Borrower:

(1) Conducted marketing in accordance with Sec. 885.600(a) and

otherwise complied with Sec. 885.600;

(2) Has taken and continues to take all feasible actions to fill

the vacancy; and

(3) Has not rejected any eligible applicant except for good cause

acceptable to HUD.

(c) Vacancies after rent-up. If an eligible family vacates a unit,

the Borrower is entitled to vacancy payments in the amount of 80

percent of the contract rent for the first 60 days of vacancy if the

Borrower:

(1) Certifies that it did not cause the vacancy by violating the

lease, the HAP contract, or any applicable law;

(2) Notified HUD of the vacancy or prospective vacancy and the

reasons for the vacancy immediately upon learning of the vacancy or

prospective vacancy;

(3) Has fulfilled and continues to fulfill the requirements

specified in Sec. 885.600(a) (2) and (3) and Sec. 885.650(b) (2) and

(3); and

(4) For any vacancy resulting from the Borrower's eviction of an

eligible family, certifies that it has complied with Sec. 885.630.

(d) Vacancies for longer than 60 days. If a unit continues to be

vacant after the 60-day period specified in paragraph (b) or (c) of

this section, the Borrower may [[Page 2669]] apply to receive

additional vacancy payments in an amount equal to the principal and

interest payments required to amortize that portion of the debt service

attributable to the vacant unit for up to 12 additional months for the

unit if:

(1) The unit was in decent, safe and sanitary condition during the

vacancy period for which payment is claimed;

(2) The Borrower has fulfilled and continues to fulfill the

requirements specified in paragraph (b) or (c) of this section, as

appropriate; and

(3) The Borrower has demonstrated to the satisfaction of HUD that:

(i) For the period of vacancy, the project is not providing the

Borrower with revenues at least equal to project expenses (exclusive of

depreciation) and the amount of payments requested is not more than the

portion of the deficiency attributable to the vacant unit; and

(ii) The project can achieve financial soundness within a

reasonable time.

(e) Prohibition of double compensation for vacancies. If the

Borrower collects payments for vacancies from other sources (tenant

rent, security deposits, payments under Sec. 885.635(c), or

governmental payments under other programs), the Borrower shall not be

entitled to collect vacancy payments to the extent these collections

from other sources plus the vacancy payment exceed contract rent.

(Approved by the Office of Management and Budget under control

number 2502-0371).

Dated: December 22, 1994.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Commissioner.

[FR Doc. 95-552 Filed 1-9-95; 8:45 am]

BILLING CODE 4210-27-P