Office of the Assistant Secretary for HousingFederal Housing Commissioner; Regulatory Reinvention; Tax Exemption of Obligations of Public Housing Agencies and Related Amendments

SUMMARY: This final rule amends HUD's regulations governing the tax

exemption of obligations of public housing agencies. In an effort to

implement the President's regulatory reform initiative, this rule will

streamline these regulations by eliminating provisions that are

redundant of statutes or otherwise unnecessary. Further, on April 20,

1995 (60 FR 19695), HUD published a rule proposing to amend these

regulations to codify the guidelines which have governed Section 8 bond

refundings. This rule finalizes the policies and procedures set forth

in the April 20, 1995 proposed rule, and discusses the issues raised by

public comments submitted on the proposed rule. The rule also makes a

clarifying amendment to the existing regulations.

EFFECTIVE DATE: May 1, 1996.

FOR FURTHER INFORMATION CONTACT: James Mitchell, Director, Financial

Services Division, Department of Housing and Urban Development, 470

L'Enfant Plaza East, room 3120, Washington, DC 20024, telephone number

(202) 708-7450, ext. 125 (this is not a toll-free number). For hearing-

and speech-impaired persons, this number may be accessed via TDD by

calling the Federal Information Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

A. Part 811 and the President's Regulatory Reinvention Initiative

On March 4, 1995, President Clinton issued a memorandum to all

Federal departments and agencies regarding regulatory reinvention. In

response to this memorandum, the Department of Housing and Urban

Development conducted a page-by-page review of its regulations to

determine which can be eliminated, consolidated, or otherwise improved.

As part of this review, HUD examined its regulations at 24 CFR part

811, which govern the tax exemption of obligations of public housing

agencies. HUD has determined that 24 CFR part 811 can be improved and

streamlined by eliminating unnecessary provisions.

Several provisions in part 811 repeat statutory language from the

United States Housing Act of 1937 (42 U.S.C. 1437 et seq.). It is

unnecessary to repeat statutory requirements in the Code of Federal

Regulations, since these requirements are otherwise fully accessible

and binding. Furthermore, regulatory provisions which reiterate

statutory language, must be amended each time Congress amends the

statute. Therefore, this final rule removes redundant statutory

language and replaces it with a citation to the specific statutory

section.

Some provisions in part 811 are now obsolete. For instance, this

rule removes obsolete provisions that were designed for the original

construction or substantial rehabilitation of subsidized Section 8

rental housing. Further, the program described in subpart B of part

811, concerning the purchase of GNMA guaranteed mortgage-backed

securities with tax exempt obligations, has never been implemented by

HUD. Accordingly, this final rule removes subpart B.

Lastly, some provisions in part 811 are not regulatory

requirements. For example, several sections in the regulations contain

nonbinding guidance or explanations. While this information is very

helpful to HUD's clients, HUD will more appropriately provide this

information through handbook guidance or other materials rather than

maintain it in title 24 of the Code of Federal Regulations.

B. The April 20, 1995 Proposed Rule

1. Proposed Amendments Made by the April 20, 1995 Rule

On April 20, 1995 (60 FR 19695), HUD published for public comment a

rule proposing to amend 24 CFR part 811 to codify the guidelines that

have governed Section 8 bond refundings.

HUD's regulations at 24 CFR part 811, subpart A govern HUD's

issuance of a Notification of Tax Exemption. These regulations were

designed for the original construction or substantial rehabilitation of

subsidized Section 8 rental housing. Refunding transactions not

involving construction funding have required the Assistant Secretary

for Housing-FHA Commissioner to issue a Notification of Tax Exemption

that waives several sections of 24 CFR part 811, subpart A. This waiver

process elevates to the Assistant Secretary level a programmatic

approval that has become routine and perfunctory in recent years.

The April 20, 1995 rule proposed to create a new

Sec. 811.119,1 which would codify the policy and procedural

guidelines that have governed Section 8 bond refundings since 1989. The

new section would provide a self-contained refunding regulation that

would dispense with the need for most waivers. The preamble to the

April 20, 1995 proposed rule described in detail the amendments to 24

CFR part 811, subpart A.

\1\ As a result of the streamlining amendments made in

compliance with President Clinton's regulatory reform initiative,

several sections in part 811 have been renumbered. This rule

finalizes proposed Sec. 811.119 at Sec. 811.110. Substantively,

Sec. 811.110 is identical to proposed Sec. 811.119, except where

changes have been made in response to public comment. The preamble

to this final rule contains a discussion of the public comments

received on the April 20, 1995 proposed rule, and HUD's responses to

them.

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2. Discussion of Public Comments on the April 20, 1995 Proposed Rule

The public comment period on the proposed rule expired on June 19,

1995. By close of business on that date, a total of 6 comments had been

received. The following section of the preamble presents a summary of

the significant issues raised by the public commenters on the proposed

rule, and HUD's responses to these comments.

Proposed Sec. 811.119(g) Exceeded HUD Authority

Comment. Paragraph (g) of proposed Sec. 811.119 stated that ``HUD

will consent to release reserves, as provided by the Trust Indenture,

in an amount remaining after correction of project physical

deficiencies and/or replenishment of replacement reserves * * * upon

execution by the project owner of a use agreement, and amendment of a

regulatory agreement, if applicable, to extend low-income tenant

occupancy for ten years after expiration of the HAPC.'' Four of the

commenters believed that this provision exceeded HUD's authority.

The commenters noted that the provisions of proposed paragraph (g)

were not included in the ``old reg'' version of 24 CFR part 811, which

was effective from September, 1977 until March, 1979. These commenters

believed that to the extent paragraph (g) purported to apply to

transactions financed under the ``old regs'', HUD would be violating

the contractual rights of participants in those transactions. The

commenters noted that there appears to be no legal basis for the

requirement that HUD approve the

[[Page 14457]]

release of reserves from trust indentures that are being refunded,

defeased or prepaid. In most ``old reg'' transactions those reserves

belong to the project owners upon defeasance of the prior bonds. The

commenters believed that HUD's attempt to condition the release of the

owner's money upon the owner's entrance into a use agreement raised

serious legal and constitutional issues.

HUD Response. HUD interprets the prohibition of refundings

described in Sec. 811.106(d) of the ``old regs'' to apply to refundings

of outstanding section 11(b) bonds by any means, not only by a new

section 11(b) bond issue. Therefore, a waiver of ``old reg''

Sec. 811.106(d) is required to refund ``old reg'' bonds. The waiver of

a regulatory provision is more than a perfunctory function, since HUD

must first determine that the public will benefit by the waiver.

HUD does not dispute that project owners or PHAs are entitled to

reserve balances as provided in ``old reg'' indentures. However, HUD

considers it sensible to review the condition of the project and its

future as low-income housing before these usually large sources of

funds are used for purposes unrelated to the project. Further, it is

not unreasonable for PHAs to extend low-income occupancy for a period

of ten years in return for use of the released reserves.

HUD also notes that many ``old reg'' indentures specifically

require that HUD consent to the refunding of the bonds. The ``old

regs'' at Sec. 811.107(d) provide that excess reserves shall be used

for project purposes. HUD has waived this requirement to accommodate

refundings which use reserves for other purposes, provided that HUD

found no need for physical repairs. However, HUD believes it is

reasonable to give the project first consideration.

The final rule has been revised to increase flexibility in the case

of privately owned projects. Specifically, the final rule provides that

the use extension may be waived on the basis of some other public

benefit, such as transfer of ownership to a nonprofit entity, or

correction of project physical or operating deficiencies. This exercise

of HUD waiver authority to secure a sound resource of low-income

housing will benefit HUD, PHAs, owners, and project residents.

This final rule also clarifies that in those instances involving a

simple defeasance without pay-off of ``old reg'' section 11(b) bonds,

HUD will review the financing terms only to the extent that a HUD

approval is needed in the transaction.

Proposed Rule's Relation to 24 CFR Part 883 Unclear

Comment. Three commenters wondered whether the proposed rule

applied to bonds issued by approved state housing finance agencies

pursuant to 24 CFR part 883. One of the commenters wrote that the April

20, 1995 proposed rule was contradictory on the issue of its

applicability to part 883. The preamble to the proposed rule stated

that the rule applied only to refundings of bonds exempt under Section

11(b). However, the commenter noted that proposed Sec. 811.119

contained at least one reference to part 883 in paragraph (c), and

paragraphs (f) and (h) appeared to address all McKinney Act refundings

of Section 8 projects regardless of the source of the tax-exemption.

Another commenter was particularly concerned about paragraph (c) of

proposed Sec. 811.119. The first sentence of paragraph (c) stated that

``[c]ompliance with Secs. 811.104 and 811.105 shall not be required for

refunding obligations which derive tax exemption from authority other

than Section 11(b) of the [United States Housing Act of 1937].'' The

commenter believed that by stating that non-11(b) bonds need not comply

with Secs. 811.104 and 811.105, it could be argued that bonds issued

pursuant to part 883 must comply with all other provisions of part 811.

The commenter also worried about the second sentence of paragraph

(c), which stated that ``compliance with the provisions of 24 CFR part

883 shall be required to the extent bond counsel finds such provisions

applicable.'' The commenter believed that this sentence could be

interpreted to permit bond counsel, in part 883 refundings of part 883

bonds, to select those provisions of part 883 it thought applicable,

and ignore the rest of the regulatory provisions.

The commenter suggested that paragraph (c) of proposed Sec. 811.119

be revised to state that it does not apply to bonds issued by State

Agencies under 24 CFR part 883 and which derive tax exemption from

authority other than Section 11(b) of the United States Housing Act of

1937.

HUD Response. HUD has clarified the final rule to explicitly limit

its applicability to State Agency Section 8 bond issues to: (1)

Reiteration of the prohibition of duplicate fees in part 883; and (2)

in the case of McKinney Act refundings, compliance with paragraphs (f)

and (h) of Sec. 811.110. Further, in response to the second commenter,

HUD has amended the rule to clarify that its requirements apply only to

refunding bonds issued pursuant to Sec. 811.110. This final rule also

removes the first two sentences of paragraph (c) of proposed

Sec. 811.119.

Proposed Rule's Relationship to Internal Revenue Code Unclear

Comment. The first sentence of proposed Sec. 811.119(c) stated that

``[c]ompliance with Secs. 811.104 and 811.105 shall not be required for

refunding obligations which derive tax exemption from authority other

than Section 11(b).'' Proposed Sec. 811.119(i) stated that

``[r]efunding bonds, including interest thereon, approved under

proposed Sec. 811.119 shall be exempt from all taxation now or

hereafter imposed by the United States.'' Two commenters pointed out

that since 1982 all tax exempt bonds, including section 11(b) bonds,

must comply with the Internal Revenue Code. Compliance with 24 CFR part

811 alone is no longer sufficient for tax-exemption.

The commenters believed that paragraphs (c) and (i) could easily be

read to suggest that only compliance with 24 CFR part 811 is necessary

for tax exemption. The commenters suggested that the final rule

explicitly state that compliance with part 811 does not eliminate the

need to comply with the Internal Revenue Code.

HUD Response. HUD agrees with the commenters that the proposed rule

required clarification on the relationship between part 811 and the

Internal Revenue Code. Accordingly, the final rule has been revised to

provide that compliance with the requirements of 24 CFR part 811 does

not assure compliance with the relevant provisions of the Internal

Revenue Code.

Paragraph (h) of Proposed Sec. 811.119 Was Too Limiting

Comment. The first sentence of paragraph (h) of proposed

Sec. 811.119 stated that ``[a]gencies shall have wide latitude in the

design of specific delivery vehicles for use of McKinney Act savings.''

Paragraph (h) went on to set forth a list of eligible activities for

which savings ``shall'' be utilized. Three commenters believed that the

remainder of paragraph (h) contradicted the flexibility promised in the

first sentence. Furthermore, the commenters believed that paragraph (h)

was more restrictive than current HUD practice.

The commenters suggested similar remedies for the perceived

strictness of paragraph (h). One of the commenters suggested that the

word ``shall'' in the second sentence of paragraph (h) be replaced with

the word ``may.'' The commenter also recommended that

[[Page 14458]]

HUD include at the end of the sentence an additional phrase permitting

``other activities approved by HUD.'' Another of the commenters

recommended that HUD add a new third sentence to the following effect:

``These include programs designed to assist in obtaining shelter such

as rent subsidy and similar tenant based programs.''

HUD Response. HUD agrees with the commenters and has adopted all

their suggestions in this final rule.

Rule Should Reference ``Trustee Sweeps''

Comment. Paragraph (d) of proposed Sec. 811.119 stated that the

Assistant Secretary's approval of the Notification of Tax Exemption

would be based on the conformity of the ``refunding's terms and

conditions * * * to subpart A's requirements, including[,] * * * where

possible, reduction of Section 8 assistance payments through lower

contract rents or equivalent means.'' One of the commenters wondered

whether paragraph (d) covered a subsidy recapture method known as the

``Trustee Sweep.'' According to the commenter most of the FHA-Insured

Section 8 refundings that have occurred have used this method.

HUD Response. This final rule clarifies that the ``Trustee Sweep''

is a permissible subsidy recapture method.

Proposed Rule Failed To Take Underwriters Into Account

Comment. Paragraph (e)(1) of proposed Sec. 811.119 stated that

HUD's evaluation of the Section 8 refunding proposal ``shall determine

that the proposed amount of refunding obligations is the amount needed

to * * * fund a debt service reserve to the extent required by bond

rating agencies which rate the credit quality of the refunding bonds.''

Two commenters believed that paragraph (e)(1) of proposed Sec. 811.119

failed to cover certain financings. The commenters wrote that in

financings closed on a non-rated basis, the underwriter, as opposed to

the Rating Agency, will often require a debt service reserve fund based

upon its determination of investor requirements. The commenters

suggested that the final rule allow for the sizing of the debt service

reserve in this manner.

HUD Response. This final rule adopts the recommendation made by the

commenters and recognizes that debt service reserves may also be

required by credit enhancers and, for unrated bonds, by the

underwriter.

Repayment Term Limit Requires Change

Comment. Two commenters expressed concern over paragraph (e)(2) of

proposed Sec. 811.119, which prohibited the repayment term of the

refunding bonds from exceeding the remaining term of the project's

mortgage, or in the absence of a mortgage, the HAP Contract. One of the

commenters wrote that the proposed paragraph was insufficiently broad.

This commenter pointed out that in MBIA transactions the insurer

requires that the maturity of the bonds extend a year beyond the

mortgage maturity. The bonds are redeemed concurrently with mortgage

maturity but the stated maturity is longer.

The commenter also believed that paragraph (e)(2) would create

unnecessary difficulties for some agencies seeking to refinance. The

commenter noted that in the original 11(b) financings, the transactions

had to be structured based on an estimate of when the project was to be

completed. Based on that estimate, the expiration of the HAP contract

was derived. This expiration date became the basis for the maturity of

the bonds, since the HAP contract was the primary security for the

bonds. However, in some financings, the project was completed sooner

than anticipated and, therefore, the HAP contract was executed earlier

than estimated. In those instances the HAP contract could expire

sometime before the maturity date of the bonds.

The commenter felt that by requiring that refunding bonds mature at

a date not exceeding the expiration of the HAP contract, the rule would

produce structuring problems as a result of the term of the refunding

bonds being forced to be shorter than the term of the bonds they are

refunding. However, the commenter noted that if the HAP contract term

is later than the original bond term, it might be advantageous to have

a bond term that takes full advantage of the HAP contract term. The

commenter suggested that HUD allow the term of the bonds on uninsured

loan transactions to extend to the later of the expiration of the HAP

contract or the final maturity of the refunded bonds.

Another commenter believed paragraph (e)(2) of proposed

Sec. 811.119 posed compliance difficulties for agencies seeking to

refinance projects at lower interest rates. The commenter noted that in

order to comply with rating agency structuring criteria relating to

debt service reserve funds in transactions where there is an insured

mortgage loan, the bonds often are structured to mature between 6

months and one year after the last required mortgage payment. This is

necessary because mortgage loans with grace periods are assumed by

rating agencies and bond underwriters to be received at the end of the

grace period. A second reason for this requirement is the potential

that a mortgage loan might be in default at the time of its stated

maturity, requiring an invasion of the debt service reserve fund

pending disbursement of FHA mortgage insurance proceeds, which could be

received after final due date of the last mortgage payment. Rating

agencies typically require a structure in which up to one year is

assumed to elapse between the date of default on the mortgage and the

receipt of the final installment of FHA mortgage insurance proceeds.

Accordingly, the commenter suggested that paragraph (e)(2) be amended

to add the words ``by more than one year'' after the phrase ``may not

exceed.''

HUD Response. HUD agrees with these comments and has incorporated

them in the final rule.

The Proposed Rule Created Uncertainty About the Continuation of Current

HUD Practices

Comment. One commenter believed that paragraph (f) of proposed

Sec. 811.119 created uncertainty among agencies seeking to refinance.

This paragraph stated that for McKinney Act Projects, HUD would split

the savings with an agency, in accordance with the terms of the

Refunding Agreement. Paragraph (f) required that the Refunding

Agreement incorporate the agency's Housing Plan. The paragraph further

mandated that the Housing Plan provide for ``decent, safe, and sanitary

housing for very-low income households.'' Additionally, the Housing

Plan was required to ``address the physical condition of the projects

participating in the refunding which generate[d] the McKinney Act

savings and, if necessary, provide for the correction of existing

deficiencies which [could] not be funded completely by existing project

replacement reserves and/or by a portion of refunding bond proceeds.''

The commenter believed that paragraph (f) was inconsistent with

existing HUD policies. First, the commenter believed paragraph (f)

contradicted a HUD memorandum concerning savings splits. Furthermore,

the commenter wrote that HUD has approved the application of savings

for uses other than those required by paragraph (b). For example, the

commenter claimed that HUD has not required that savings be used to

benefit a specific project. The commenter also wrote that savings

currently need to be

[[Page 14459]]

used in connection with low-income households, as distinguished from

very-low-income households.

HUD Response. HUD acknowledges that the proposed rule did not

accurately reflect HUD's current policy regarding savings splits.

Accordingly, this final rule corrects this discrepancy by providing

that for McKinney Act refundings of projects which did not receive a

Financing Adjustment Factor (``FAF''), HUD will allow up to 50 percent

of debt service savings to be allocated to the project account. In such

cases, the remainder of the debt service savings will be shared equally

by the agency and the U.S. Treasury. However, the other assertions made

by the commenter are incorrect. For example, section 1012(a) of the

McKinney Act restricts assistance to ``very low-income families.'' (42

U.S.C. 1437f note.)

Revision of Bond Counsel Certification Requirement

Comment. The last sentence of paragraph (d) of proposed

Sec. 811.119 stated that the results of a refunding bond sale had to

``certified'' by bond counsel. One commenter was disturbed by the use

of the word ``certified.'' The commenter wrote that bond counsel are

not in a position to certify such matters, other than in reliance on

information provided by other parties. Another commenter, while not

objecting to the term ``certify'', noted that bond counsel are seldom

financial experts. The commenter suggested that the rule be amended to

permit certification by a bona fide financial expert, such as a

certified public accountant or an investment banker.

HUD Response. HUD has adopted both comments. This final rule uses

the term ``written confirmation'', rather than ``certify.'' Further, it

permits ``other acceptable closing participants'' to provide written

confirmation.

Flexible Yield Limitation Required

Comment. Paragraph (e)(3) of proposed Sec. 811.119 limited the bond

yield to not more than 75 basis points above the 20 Bond General

Obligation Index ``published by the Daily Bond Buyer for the week

immediately preceding the sale of the bonds.'' One commenter felt that

this paragraph would place the continuation of current HUD practices in

doubt, and might create the necessity for waivers.

The commenter noted that HUD has in the past waived the bond yield

limitation for certain financings. Furthermore, HUD from time to time

published notices which allowed a 150 basis point spread on uninsured

deals. The commenter suggested that paragraph (e)(3) be amended to add

``except as otherwise approved by HUD'', in order to eliminate the need

for waivers.

HUD Response. In recognition of rating agency concerns about the

future renewability of HAP contracts, HUD has revised the final rule to

incorporate the phrase suggested by the commenter. However, HUD's

experience has shown that the 20 Bond General Obligation Index plus 75

basis points provides a valid market sensitive yield limit for a

variety of transactions.

Paragraph (d) of Proposed Sec. 811.119 Required Clarification

Comment. One commenter raised several concerns over paragraph (d)

of proposed Sec. 811.119. This paragraph stated that ``[u]pon

conclusion of the sale of refunding bonds, the results must be

certified to HUD by bond counsel, including a schedule of the specific

amount of savings in Section 8 assistance where applicable, and a final

statement of Sources and Uses.''

The commenter pointed out that the term ``sale'' usually signifies

the signing of a Bond Purchase Agreement, at which time it may be

premature to provide the information requested by paragraph (d). This

commenter suggested that the word ``closing'' be substituted for

``sale.'' The commenter was also uncertain about the information HUD

meant to include in the term ``results.''

HUD Response. HUD agrees with the points raised by the commenter.

Accordingly, the final rule has been revised to use the term

``closing'', rather than ``sale.'' Further, this final rule replaces

the term ``results'' with a specific list of the closing information

required by HUD.

Paragraph (e) of Proposed Sec. 811.119 Was Vague

Comment. One of the commenters believed that paragraph (e) of

proposed Sec. 811.119 was vague. For example, paragraph (e)(2)

prohibited the repayment term of the refunding bonds from exceeding the

remaining term of the ``project mortgage, or in the absence of a

mortgage, the remaining term of the Housing Assistance Payments

Contract (the `HAPC').'' The commenter wondered whether HUD meant an

insured or uninsured mortgage. The commenter also believed that

paragraph (e)(3) required further clarification on servicing and

trustee fees. The proposed rule limited these fees to ``[a]n amount not

to exceed one-fourth of one percent annually of the bonds.'' The

commenter felt it would be ``advisable to allow for the calculation of

fees to be based on the outstanding mortgage balance.''

HUD Response. HUD has amended the final rule to provide the

clarification requested by the commenter. The final rule clarifies that

the term ``project mortgage'' refers to an insured mortgage. Further,

the final rule specifies that the limit on servicing and trustee fees

is based on the outstanding principal balance of the bonds.

Definition of McKinney Act Project Was Vague

Paragraph (f) of proposed Sec. 811.119 concerned ``projects placed

under HAPC between January 1, 1979 and December 31, 1984 (otherwise

known as `McKinney Act Projects').'' One commenter believed that HUD

should clarify what constitutes a ``McKinney Act Project.'' The

commenter pointed out that HUD has construed this ambiguous statutory

language to cover projects for which the date of HAPC execution fell

within January 1, 1979 and December 31, 1984, as distinguished from the

effective date of the HAPC, or conceivably the AHAP date. The commenter

suggested that the final rule make this construction explicit.

HUD Response. HUD has adopted the recommendation made by the

commenter. The final rule defines a ``McKinney Act Project'' as a

project ``for which the Agreement to enter into the HAPC was executed

between January 1, 1979 and December 31, 1984.''

Paragraph (g) of Proposed Sec. 811.119 Ambiguous in the Case of HAPCs

With Renewable Five-Year Terms

Comment. Paragraph (g) of proposed Sec. 811.119 conditioned the

release of reserves upon the project owner's agreement ``to extend low

income tenant occupancy for ten years after expiration of the HAPC.''

One commenter believed that this provision could be ambiguous in the

case of a HAPC with renewable five-year terms. The commenter wondered

whether paragraph (g) meant ten years after HUD's or the Contract

Administrator's first right to terminate, ten years after the owner's

first opt-out date without HUD consent, or ten years after the budget

authority term.

HUD Response. HUD has revised the final rule to specify that the

use agreement must extend for ten years past the owner's first opt-out

date.

Payments to Providers of Professional Services

Comment. One of the commenters felt there was some ambiguity in the

relationship between the last two sentences of paragraph (h) of

proposed Sec. 811.119. The penultimate sentence

[[Page 14460]]

authorized homeownership counseling as an eligible use of savings.

However, the last sentence prohibited payments to third party

consultants.

HUD Response. This final rule permits fees to providers of

professional services required in an agency's McKinney Act program.

C. Clarifying Amendment to Sec. 811.105

This rule also makes a clarifying technical amendment to paragraph

(b) of Sec. 811.105. Under Sec. 811.102, the term ``Agency or

Instrumentality PHA'' is defined as an ``organization that is

authorized to engage or assist in the development or operation of low-

income housing.'' However, paragraph (b) of Sec. 811.105 requires that

the ``charter or other organic document establishing the [Agency or

Instrumentality PHA] shall limit the activities to be performed * * *

to carrying out Section 8 projects.''

Paragraph (b) of Sec. 811.105 unnecessarily restricts the

activities which may be undertaken by an Agency or Instrumentality PHA.

This limitation does not conform to the broad language of the

definition in Sec. 811.102. Further, Sec. 811.105 does not comply with

HUD's goal of expanding low-income housing opportunities through the

part 811 program regulations. The current language also requires that

HUD waive Sec. 811.105 each time an Agency or Instrumentality PHA seeks

to undertake an activity which is not a Section 8 project. The

imposition of this additional administrative barrier is contrary to the

goals of the President's reinvention Initiative, which calls for the

elimination of unnecessary bureaucratic delays.

This final rule amends paragraph (b) of Sec. 811.105 to provide

that Agency and Instrumentality PHAs may carry out Section 8 projects

and ``other low-income housing projects approved by the Secretary.''

This change will conform Sec. 811.105 to HUD's original intention in

the issuance of the part 811 regulations.

II. Justification for Final Rulemaking

HUD generally publishes a rule for public comment before issuing a

rule for effect, in accordance with its own regulations on rulemaking

in 24 CFR part 10. However, part 10 provides for exceptions to the

general rule if the agency finds good cause to omit advance notice and

public participation. The good cause requirement is satisfied when

prior public procedure is ``impracticable, unnecessary, or contrary to

the public interest'' (24 CFR 10.1). HUD finds that in this case it is

unnecessary to solicit public comment.

HUD has already solicited public comment for those amendments to

part 811 described in the April 20, 1995 proposed rule. The preamble to

this final rule contains a discussion of the comments received and of

HUD's responses to them. The streamlining amendments made in conformity

with the President's regulatory reinvention initiative do not affect or

establish policy. These amendments merely remove regulatory provisions

which are redundant of statutes or for which codification in the Code

of Federal Regulations is unnecessary. Further, it is unnecessary for

HUD to solicit comment on the clarifying amendment to Sec. 811.105.

This revision merely removes an administrative barrier which currently

limits the flexibility of program applicants. The change will eliminate

the necessity for waivers and will conform the regulations to HUD's

original intent in issuing 24 CFR part 811.

III. Other Matters

A. Regulatory Flexibility Act

The Secretary, in accordance with the Regulatory Flexibility Act (5

U.S.C. 605(b)), has reviewed and approved this final rule, and in so

doing certifies that this rule will not have a significant economic

impact on a substantial number of small entities. This rule merely

streamlines regulations by removing unnecessary provisions. The rule

will have no adverse or disproportionate economic impact on small

businesses.

B. Environmental Impact

This rulemaking does not have an environmental impact. This

rulemaking simply amends an existing regulation by consolidating and

streamlining provisions and does not alter the environmental effect of

the regulations being amended. 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) at the time of

development of regulations implementing the Tax Exempt Obligations

Program. That finding remains applicable to this rule, and is available

for public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the

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

10276, Department of Housing and Urban Development, 451 Seventh Street,

SW, Washington, DC.

C. Executive Order 12612, Federalism

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

of Executive Order 12612, Federalism, has determined that this rule

will not have substantial direct effects on States or their political

subdivisions, or the relationship between the Federal government and

the States, or on the distribution of power and responsibilities among

the various levels of government. No programmatic or policy changes

will result from this rule that would affect the relationship between

the Federal Government and State and local governments.

D. Executive Order 12606, The Family

The General Counsel, as the Designated Official under Executive

Order 12606, The Family, has determined that this rule will not have

the potential for significant impact on family formation, maintenance,

or general well-being, and thus is not subject to review under the

Order. No significant change in existing HUD policies or programs will

result from promulgation of this rule.

List of Subjects in 24 CFR Part 811

Public housing, Securities, Taxes.

Accordingly, 24 CFR part 811 is amended to read as follows:

PART 811--TAX EXEMPTION OF OBLIGATIONS OF PUBLIC HOUSING AGENCIES

AND RELATED AMENDMENTS

1. The authority citation for 24 CFR part 811 continues to read as

follows:

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

Subpart A--[Removed]

2. The heading for subpart A is removed.

3. Section 811.101 is revised to read as follows:

Sec. 811.101 Purpose and scope.

(a) The purpose of this part is to provide a basis for determining

tax exemption of obligations issued by public housing agencies pursuant

to Section 11(b) of the United States Housing Act of 1937 (42 U.S.C.

1437i) to refund bonds for Section 8 new construction or substantial

rehabilitation projects.

(b) This part does not apply to tax exemption pursuant to Section

11(b) for low-income housing projects developed pursuant to 24 CFR

parts 950 and 941.

4. Section 811.102 is amended by:

a. Removing the paragraph designations;

[[Page 14461]]

b. Removing the definitions of ``Capitalized Interest During

Construction'' and ``Development Cost''; and

c. Revising the definition of ``Obligations'' to read as follows:

Sec. 811.102 Definitions.

* * * * *

Obligations. Bonds or other evidence of indebtedness that are

issued to provide permanent financing of a low-income housing project.

Pursuant to Section 319(b) of the Housing and Community Development Act

of 1974, the term obligation shall not include any obligation secured

by a mortgage insured under Section 221(d)(3) of the National Housing

Act (12 U.S.C. 1715l) and issued by a public agency as mortgagor in

connection with the financing of a project assisted under Section 8 of

the Act. This exclusion does not apply to a public agency as mortgagee.

* * * * *

5. Section 811.105 is amended by revising the first sentence in

paragraph (b) to read as follows:

Sec. 811.105 Approval of agency or instrumentality PHA.

* * * * *

(b) The charter or other organic document establishing the

applicant shall limit the activities to be performed by the applicant,

and funds and assets connected therewith, to carrying out or assisting

in carrying out Section 8 projects and other low-income housing

projects approved by the Secretary. * * *

* * * * *

Sec. 811.106 [Amended]

6. Section 811.106 is amended by revising the section heading; by

removing paragraphs (a), (b), and (c); and by removing the paragraph

designation to paragraph (d), to read as follows:

Sec. 811.106 Default under the contract.

* * * * *

7. Section 811.107 is revised to read as follows:

Sec. 811.107 Financing documents and data.

(a) The financing agency shall assure that any official statement

or prospectus or other disclosure statement prepared in connection with

the financing shall state on the first page that:

(1) In addition to any security cited in the statement, the bonds

may be secured by a pledge of an Annual Contributions Contract and a

Housing Assistance Payments Contract, executed by HUD;

(2) The faith of the United States is solemnly pledged to the

payment of annual contributions pursuant to the Annual Contributions

Contact or to the payment of housing assistance payments pursuant to

the Housing Assistance Payments Contract, and funds have been obligated

by HUD for such payments;

(3) Except as provided in any contract of mortgage insurance, the

bonds are not insured by HUD;

(4) The bonds are not to be construed as a debt or indebtedness of

HUD or the United States, and payment of the bonds is not guaranteed by

the United States;

(5) Nothing in the text of a disclosure statement is to be

interpreted to conflict with the above; and

(6) HUD has not reviewed or approved and bears no responsibility

for the content of disclosure statements.

(b) The financing agency shall retain in its files the

documentation relating to the financing. A copy of this documentation

shall be furnished to HUD upon request.

8. Section 811.108 is revised to read as follows:

Sec. 811.108 Debt service reserve.

(a) FHA-Insured projects. (1) The debt service reserve shall be

invested and the income used to pay principal and interest on that

portion of the obligations which is attributable to the funding of the

debt service reserve. Any excess investment income shall be added to

the debt service reserve. In the event such investment income is

insufficient, surplus cash or residual receipts, to the extent approved

by the field office, may be used to pay such principal and interest

costs.

(2) The debt service reserve and its investment income shall be

available only for the purpose of paying principal or interest on the

obligations. The use of the debt service reserve for this purpose shall

not be a cure for any failure by the owner to make required payments.

(3) Upon full payment of the principal and interest on the

obligations (including that portion of the obligations attributable to

the funding of the debt service reserve), any funds remaining in the

debt service reserve shall be remitted to HUD.

(b) Non-FHA-insured projects. (1) Investment income from the debt

service reserve, up to the amount required for debt service on the

bonds attributable to the debt service reserve, shall be credited

toward the owner's debt service payment. Any excess investment income

shall be added to and become part of the debt service reserve.

(2) The debt service reserve and investment income thereon shall be

available only for the purpose of paying principal or interest on the

obligations. The use of the debt service reserve for this purpose shall

not be a cure for any failure by the owner to make required payments.

(3) Upon full payment of the principal and interest on the

obligations (including that portion of the obligations attributable to

the funding of the debt service reserve), any funds remaining in the

debt service reserve shall be remitted to HUD.

Secs. 811.109 through 811.113 [Removed]

9. Sections 811.109 through 811.113 are removed.

Sec. 811.114 [Redesignated]

10. Section 811.114 is redesignated as Sec. 811.109 and newly

redesignated Sec. 811.109 is amended by removing paragraphs (a) through

(c), and by removing the paragraph designation to paragraph (d).

Secs. 811.115 through 811.118 [Removed]

11. Sections 811.115 through 811.118 are removed.

12. Section 811.110 is added to read as follows:

Sec. 811.110 Refunding of obligations issued to finance Section 8

projects.

(a) This section states the terms and conditions under which HUD

will approve refunding or defeasance of certain outstanding debt

obligations which financed new construction or substantial

rehabilitation of Section 8 projects, including fully and partially

assisted projects.

(b) In the case of bonds issued by State Agencies qualified under

24 CFR part 883 to refund bonds which financed projects assisted

pursuant to 24 CFR part 883, HUD requires compliance with the

prohibition on duplicative fees contained in 24 CFR part 883 and with

paragraphs (f) and (h) of this section, as applicable to the projects

to be refunded.

(c) No agency shall issue obligations to refund outstanding 11(b)

obligations until the Office of the Assistant Secretary for Housing

sends the financing agency a Notification of Tax Exemption based on

approval of the proposed refunding's terms and conditions as conforming

to this part's requirements, including continued operation of the

project as housing for low-income families, and where possible,

reduction of Section 8 assistance payments through lower contract rents

or an equivalent cash rebate to the U.S. Treasury (i.e. Trustee Sweep).

The agency shall submit such documentation as HUD determines is

necessary for review and approval of the refunding transaction. Upon

conclusion

[[Page 14462]]

of the closing of refunding bonds, written confirmation must be sent to

the Office of Multifamily Housing by bond counsel, or other acceptable

closing participant, including a schedule of the specific amount of

savings in Section 8 assistance where applicable, CUSIP number

information, and a final statement of Sources and Uses.

(d) (1) HUD approval of the terms and conditions of a Section 8

refunding proposal requires evaluation by HUD's Office of Multifamily

Housing of the reasonableness of the terms of the Agency's proposed

financing plan, including projected reductions in project debt service

where warranted by market conditions and bond yields. This evaluation

shall determine that the proposed amount of refunding obligations is

the amount needed to: pay off outstanding bonds; fund a debt service

reserve to the extent required by credit enhancers or bond rating

agencies, or bond underwriters in the case of unrated refunding bonds;

pay credit enhancement fees acceptable to HUD; and pay transaction

costs as approved by HUD according to a sliding scale ceiling based on

par amount of refunding bond principal. Exceptions may be approved by

HUD, if consistent with applicable statutes, in the event that an

additional issue amount is required for project purposes.

(2) The stated maturity of the refunding bonds may not exceed by

more than one year the remaining term of the project mortgage, or in

the case of an uninsured loan, the later of expiration date of the

Housing Assistance Payments Contract (the ``HAPC'') or final maturity

of the refunded bonds.

(3) The bond yield may not exceed by more than 75 basis points the

20 Bond General Obligation Index published by the Daily Bond Buyer for

the week immediately preceding the sale of the bonds, except as

otherwise approved by HUD. An amount not to exceed one-fourth of one

percent annually of the bonds' outstanding principal balance may be

allowed for servicing and trustee fees.

(e) For projects for which the Agreement to enter into the HAPC was

executed between January 1, 1979, and December 31, 1984 (otherwise

known as ``McKinney Act Projects''), for which a State or local agency

initiates a refunding, the Secretary shall make available to an

eligible issuing agency 50 percent of the Section 8 savings of a

refunding, as determined by HUD on a project-by-project basis, to be

used by the agency in accordance with the terms of a Refunding

Agreement executed by the Agency and HUD which incorporates the

Agency's Housing Plan for use of savings to provide decent, safe, and

sanitary housing for very low-income households. In determining the

amount of savings recaptured on a project-by-project basis, as

authorized by section 1012(b) of the McKinney Act, HUD will take into

account the physical condition of the projects participating in the

refunding which generate the McKinney Act savings and, if necessary,

HUD will finance in refunding bond debt service correction of existing

deficiencies which cannot be funded completely by existing project

replacement reserves or by a portion of reserves released from the

refunded bond's indenture. For McKinney Act refundings of projects

which did not receive a Financing Adjustment Factor (``FAF''), HUD will

allow up to 50 percent of debt service savings to be allocated to the

project account; in which case, the remainder will be shared equally by

the Agency and the U.S. Treasury.

(f) For refundings of Section 8 projects other than McKinney Act

Projects, and for all transactions which substitute collateral for, but

do not redeem, outstanding obligations, and for which a HUD approval is

needed (such as assignment of a HAPC or insured mortgage note), the

Office of Multifamily Housing in consultation with HUD Field Office

Counsel will review the HAPC, the Trust Indenture for the outstanding

obligations, applicable HUD regulations, and reasonableness of proposed

financing terms. In particular, HUD review should be obtained for the

release of reserves from the trust indenture of the outstanding 11(b)

bonds that are being refunded, defeased, or pre-paid. A proposal to

distribute to a non-Federal entity the benefits of a refinancing, such

as debt service savings and/or balances in reserves held under the

original Trust Indenture, should be referred to the Office of

Multifamily Housing for further review. In proposals submitted for HUD

approval, HUD will consent to release reserves, as provided by the

Trust Indenture, in an amount remaining after correction of project

physical deficiencies and/or replenishment of replacement reserves,

where needed. In the case of a refunding of 11(b) bonds by a public

agency issuer which is the owner of the project and is entitled to

reserves held under the Trust Indenture, HUD requires execution by the

project owner of a use agreement, and amendment of a regulatory

agreement, if applicable, to extend low-income tenant occupancy for ten

years after expiration of the original HAPC term. In the case of HAP

contracts with renewable 5-year terms, the Use Agreement shall extend

for 10 years after the project owners first opt-out date. The Use

Agreement may also be required of private entity owners, unless the

refunding is incidental to a transfer of project ownership or a

transaction which provides a substantial public benefit, as determined

by the Office of Multifamily Housing. Proposed use of benefits shall be

consistent with applicable appropriations law, the HAPC, and other

requirements applicable to the original project financing, and the

proposed financing terms must be reasonable in relation to bond market

yields and transaction fees, as approved by the HUD Office of

Multifamily Housing.

(g) Agencies shall have wide latitude in the design of specific

delivery vehicles for use of McKinney Act savings, subject to HUD audit

of each Agency's performance in serving the targeted income eligible

population. Savings may be used for shelter costs of providing housing,

rental, or owner-occupied, to very low-income households through new

construction, rehabilitation, repairs, and acquisition with or without

rehab, including assistance to very low-income units in mixed-income

developments. These include programs designed to assist in obtaining

shelter, such as rent or homeownership subsidies. Self-sufficiency

services in support of very low-income housing are also eligible, and

may include, but are not limited to, homeownership counseling,

additional security measures in high-crime areas, construction job

training for residents' repair of housing units occupied by very low-

income families, and empowerment activities designed to support

formation and growth of resident entities. Except for the cost of

providing third-party program audit reports to HUD, eligible costs

exclude consultant fees or reimbursement of Agency staff expenses, but

may include fees for professional services required in the Agency's

McKinney Act programs of assistance to very low-income families. Unless

otherwise specified by HUD in a McKinney Agreement, savings shall be

subject to the above use requirements for 10 years from the date of

receipt of the savings.

(h) Refunding bonds, including interest thereon, approved under

this Section shall be exempt from all taxation now or hereafter imposed

by the United States, and the notification of approval of tax exemption

shall not be subject to revocation by HUD. Whether refunding bonds

approved under this section meet the requirements of

[[Page 14463]]

Section 103 or any other provisions of the Internal Revenue Code is not

within the responsibilities of HUD to determine. Such bonds shall be

prepaid during the HAPC term only under such conditions as HUD shall

require.

Dated: March 27, 1996.

Nicolas P. Retsinas,

Assistant Secretary for Housing--Federal Housing Commissioner.

[FR Doc. 96-7949 Filed 3-29-96; 8:45 am]

BILLING CODE 4210-27-P