Section 8 Certificate and Voucher Programs Conforming Rule

SUMMARY: This final rule completes the process of combining and

conforming the regulations for tenant-based rental assistance under the

Section 8 certificate and voucher programs, by adding two subparts that

had been reserved in the previous final rule establishing the single

part governing tenant-based assistance. This rule also amends

requirements for project-based assistance under the certificate

program. In addition, this rule continues the Department's regulation

streamlining efforts by revising various sections in the part

previously created to cover the combined Section 8 certificate and

voucher programs and by consolidating definitions now found in

individual program regulations into the part that covers definitions

that have broader applicability.

EFFECTIVE DATES: This rule shall be effective June 1, 1998, except

Secs. 983.254(a)(1) and (2)(i); and 983.256(c)(2)(v) shall be effective

November 27, 1998.

FOR FURTHER INFORMATION CONTACT: Gloria Cousar, Deputy Assistant

Secretary for Public and Assisted Housing Delivery, Office of Public

and Indian Housing, Room 4204. Her telephone numbers are (202) 708-2841

(voice); (202) 708-0850 (TTY). (These are not toll-free numbers.)

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The information collection requirements contained in Secs. 982.516,

982.517, 983.254, 983.255, and 983.256 of this rule have been approved

by the Office of Management and Budget (OMB) under the Paperwork

Reduction Act of 1995 (44 U.S.C. 3501-3520). The OMB approval number is

2577-0169, which expires on April 30, 2001. An agency may not conduct

or sponsor, and a person is not required to respond to, a collection of

information unless the collection displays a valid control number.

Discussion

Table of Contents

I. History and Scope of Rule

II. Types of Tenancy

III. Rent to Owner

A. Rent reasonableness (comparability)

1. Comparability requirement

2. Comparability: comments

a. Against comparability

b. For comparability

c. Comparability during term

d. How HA determines comparability

e. Rents charged by Section 8 owner

f. Administration of comparability

g. Comparability: Other issues

3. Comparability: HUD response

a. Use of comparability

b. How HA determines comparability

c. Factors considered in valuing unit

d. Rent charged by owner

B. Other limits on rent to owner

1. New provisions

2. Rent control

3. HOME rents

4. Other subsidies

IV. Maximum Subsidy

A. Purpose and proposed changes

B. FMR/exception rent limit: Comments

1. Certificate program: Elimination of HA exception authority

2. Over-FMR tenancy

3. Exception rent: HUD approval

4. Exception rent: New procedure

C. FMR/exception rent limit: New rule

1. Approval of exception rent

a. New rule

b. Area exception rent

c. Regular tenancy: Accommodation for person with disabilities

2. Exception rent: New rule--HUD response

V. Minimum Rent: Family Share of Rent

VI. Certificate Program: Over-FMR Tenancy

A. New type of tenancy

B. Over-FMR tenancy: Comments

1. General effect of rule

2. Objections to over-FMR tenancy

C. Over-FMR tenancy: 10 percent limit

1. Law

2. Comments

3. HUD response

D. Over-FMR tenancy: Affordability of rent (maximum family

share)

1. Law and regulation

2. Comments

a. Objections to affordability

b. Defining affordability

c. Affordability: Other comments

3. How HA determines affordability

E. Over-FMR tenancy: Amount of subsidy

1. Comments

2. HUD response

3. How subsidy is adjusted

F. Over-FMR tenancy: Other comments

1. HA discretion

2. Administrative fee

VII. Voucher Tenancy: Payment Standard

A. Voucher payment standard

1. Setting payment standard

2. Minimum and maximum payment standard: Comments

3. Minimum and maximum payment standard: HUD response

B. Shopping incentive

1. Comments

2. HUD response

VIII. Family Size: Effect on Amount of Subsidy

A. General

B. Space for live-in aide

IX. Over-FMR or Voucher Tenancy--Payment Standard: Changes in

Subsidy During Tenancy

A. How assistance is adjusted

B. Protecting family against drop in subsidy

C. When payment standard changes

X. Regular Tenancy--Rent to Owner: Annual Rent Adjustment During

Tenancy

A. Comments

B. New rule

XI. Regular Tenancy--Rent To Owner: Special Rent Adjustment During

Tenancy

A. General

B. Purpose

C. Comparability

D. Required documentation

E. HUD approval

F. Term

XII. Fees and Charges To Family For Meals, Supportive Services or

Other Items

XIII. Utility Allowance

A. Objections to utility allowance

1. Comments

2. HUD response

B. Administration of utility allowance

1. Comments

2. HUD response

C. Services included in utility allowance

1. Comments

2. HUD response

D. Determining utility allowance: Unit size and size of family

1. Comments

2. HUD response

E. Reasonable accommodation

F. Direct HA payment of tenant utility cost

1. Comments

2. HUD response

XIV. Reexamination of Family Income

A. Comments

B. HUD response

XV. Project-Based Certificate (PBC) Program: Rent To Owner

A. PBC: Comparability procedures

B. PBC: Approval of rent; HA certification that rent is

reasonable

C. PBC: Rent to owner: Annual adjustments

1. Adjustment by published factor

2. Adjustment comparability: Comparability studies

3. When owner requests rent increase; HA comparability study

4. Rent decrease at annual adjustment

D. PBC: Rent to owner: Special adjustments

E. PBC: Rent to owner: Correcting mistakes

F. PBC: Rent to owner: HA-owned units

XVI. Special Housing Types

A. General

B. HA choice

1. HA discretion to offer special housing type

2. Person with disabilities: Reasonable accommodation

3. Manufactured home

C. Family choice

D. Group homes for elderly or disabled

E. Other changes

1. Congregate housing

2. Shared housing

XVII. Live-In Aide For Disabled Resident

XVIII. Streamlining of Part 982

XIX. Other Changes

XX. Findings and Certifications

[[Page 23827]]

A. Impact on the environment

B. Federalism impact

C. Unfunded Mandates Reform Act

D. Impact on small entities

E. Regulatory review

I. History and Scope of Rule

On February 24, 1993 (58 FR 11292), HUD published a comprehensive

proposed rule to combine and conform the rules for tenant-based Section

8 rental assistance under the certificate and voucher programs. The

proposed rule also would have amended requirements for project-based

assistance under the Section 8 certificate program. HUD received

approximately 400 comments on the proposed rule, which generally

approve the broad purpose of the rule. Comments recommend revision of

particular features of the rule.

On July 18, 1994, HUD published the first portion of the

comprehensive final rule for the tenant-based program at 24 CFR part

982. This publication contained the final rule on unified admission

procedures for the program (59 FR 36662) (part 982, subpart E). On July

3, 1995 (60 FR 34660), HUD published the second portion of the

comprehensive final rule for the tenant-based programs at 24 CFR part

982, as well as regulations for the project-based certificate program

at 24 CFR part 983. This publication did not include provisions

concerning:

-- Calculation of the rent and housing assistance payment for the

tenant or project-based programs.

-- ``Special housing types'': program variants to meet special housing

needs, such as congregate housing, shared housing, single room

occupancy housing and group homes.

Today's publication covers the subjects omitted in the July 1995

final rule. In addition, the rule includes some streamlining and

clarifying changes to parts 982 and 983.

II. Types of Tenancy

The rule (Sec. 982.501) specifies that there are three types of

tenancy in the Section 8 tenant-based programs:

-- A ``regular'' tenancy under the certificate program;

-- An ``over-FMR'' tenancy under the certificate program; and

-- A tenancy under the voucher program.

In a regular certificate tenancy, the share of rent paid by an

assisted family is defined by a statutory formula. Section 8 subsidy

covers the balance of rent for the unit. The family may not agree to

pay a bigger share of the rent. In an over-FMR tenancy, the family may

agree to pay more. This rule adds authority for over-FMR tenancies. The

term ``regular'' tenancy is added to designate and distinguish the

original form of certificate tenancy.

Comments propose that HUD should combine the certificate and

voucher programs. Subsidy should be calculated by the same method. The

programs should not use different FMRs and voucher payment standards.

The certificate and voucher programs should use the same rent formula.

The HA should assume responsibility to administer the program and

stretch the dollars.

In this rulemaking, HUD has fully unified the tenant-based

certificate and voucher programs so far as allowed by current Federal

law. Except for limited differences in calculation of subsidy and

family contribution, the same regulations apply to the tenant-based

certificate and voucher programs, and to a regular or over-FMR tenancy

under the certificate program. For example, both programs are subject

to the same requirements concerning finding and leasing a unit, housing

quality standards and subsidy standards (maximum unit size), landlord

responsibility and family obligations.

The three forms of tenancy conform to specific statutory

requirements affecting subsidy and family contribution. Within this

framework, however, the rule is designed to minimize or eliminate

unnecessary differences.

For each tenancy, the same fair market rent or HUD approved

exception rent (called the ``FMR/exception rent limit'') determines the

maximum subsidy for a program family. Actual subsidy generally equals

maximum subsidy minus 30 percent of a family's adjusted income. For a

regular tenancy in the certificate program, the FMR/exception rent

limit is the maximum initial rent. For a voucher or over-FMR tenancy,

the FMR/exception rent limit is the maximum payment standard. The same

area exception rents apply for a regular, voucher or over-FMR tenancy.

For each type of tenancy, the rent to owner may not exceed comparable

rent.

III. Rent to Owner

A. Rent Reasonableness (Comparability)

1. Comparability Requirement

During a Section 8 tenancy, an owner's rent must be ``reasonable.''

The HA must determine whether the initial or adjusted rent for a

Section 8 unit is reasonable in comparison with rent for units in the

private unassisted market (Sec. 982.503(b) and Sec. 983.256(b)).

The final rule (Sec. 982.503(b)) refines requirements on how the HA

determines comparable rent. To determine comparability, the HA must

consider:

-- Location, quality, size, unit type and age of the contract unit, and

-- Any amenities, housing services, maintenance and utilities to be

provided by the owner in accordance with the lease.

2. Comparability: Comments

a. Against comparability. Comments assert that HUD should not

require that rents must be reasonable. Some comments suggest that HUD

should eliminate rent reasonableness in both the certificate and

voucher programs. In the certificate program, rents are controlled by

the FMRs. In the voucher program, tenants choose to pay the rent.

Other comments urge that the rent reasonableness requirement should

be limited to the certificate program and should not apply to the

voucher program. Rent reasonableness negates the designed purpose of

the voucher program--allowing a participant to freely select a higher

priced unit, reducing concentrations of low-income housing. Rent

reasonableness curbs the ability to disperse low-income families.

Comments state that participants in the voucher program like the

flexibility to negotiate rent, and to choose a higher rent unit. Owners

prefer the voucher program because they do not want to negotiate rents

with the HA. If voucher rents are limited by comparability, owners may

refuse to participate.

Comments claim that comparability subjects a landlord to de facto

rent control. Ongoing HA inspection of reasonableness reduces a

landlord's incentive to offer assisted housing. Application of rent

reasonableness creates undue owner uncertainty and confusion. Requiring

initial and annual examination of rent is a burden on a landlord's

property and privacy.

b. For Comparability. Some comments support rent reasonableness

requirements and extension of comparability to the voucher program. A

cap on family rent payment in the voucher program is overdue. Rent

reasonableness prevents owners charging excessive rents for marginal

units. Owners charge different rents for different programs. In tight

markets, a voucher tenant is forced to pay higher rent out-of-pocket.

Under the new rule, an HA can establish a systematic method for

establishing reasonable rent for the unit size.

c. Comparability During Term. The rule (Sec. 982.503(a)(4))

provides that rent must be reasonable during the whole course of an

assisted tenancy. This principle applies both to the certificate

program and to the voucher program.

[[Page 23828]]

The rent must be reasonable at the beginning of the lease, and during

the lease term.

Comments state that rent reasonableness should only apply to new

HAP contracts, not annually. Comparability should not be required

unless rent increases. According to the comments, requiring

reasonableness when rent does not increase during the lease term is an

unnecessary administrative burden.

Comments ask HUD to clarify what happens if the HA determines that

a proposed rent increase is not reasonable.

d. How HA Determines Comparability. Comments state that HUD should

clarify how to determine the relevant ``market'', and should define

``private unassisted market''. Does the unassisted market include types

of assisted housing other than Section 8? Does assisted refer to all

types of Federal, State or local subsidies, or only to housing assisted

under Section 8?

Comments state that reasonableness should not be applied on a

building by building basis. Comparability should recognize market

differences between units. An HA should not set single rents for a

class of units in a particular property. Comparability should only

assure that rent and rent increases for Section 8 and non-Section 8

units are substantially the same. Rent reasonableness should take into

account unit to unit value differences ordinarily recognized in the

market. Comparability should not override an owner's rental

determination in response to actual market dynamics.

Comments recommend that HAs should emphasize quality, age and

location of a Section 8 unit as compared with the other units. The

comments claim that HAs consider any unit that passes HQS as comparable

to an unassisted private market unit with an equal number of bedrooms.

Substandard housing and apartments are rented for the same amount as

standard and above standard rentals in the same neighborhood. Comments

state that families should not pay equal or higher rent for

``substandard'' units as for standard units rented on the unassisted

private market.

Comments assert that HUD has not given adequate guidance for

determining rent reasonableness. By contrast, there are ``extensive

regulations'' on setting and review of Fair Market Rents. Comments

recommend that HUD should require:

--Determination by a qualified person;

--Information on procedures used by an HA;

--Opportunity for negotiation and correction, and a procedure for

resolution of disputes;

--Review and correction of the HA determination of reasonable rent.

Comments ask HUD to clarify whether rent for an over-FMR tenancy

must meet rent reasonableness.

e. Rents Charged by Section 8 Owner. The proposed rule would have

provided that ``reasonable rent'' may not exceed rent charged by a

Section 8 owner for a comparable ``assisted or unassisted'' unit in the

same building. (This definition was issued as a final rule in the

second phase of this rulemaking, published July 3, 1995.) The proposed

rule also provided that an owner who accepts an assistance payment from

the HA certifies that rent does not exceed rents charged by the owner

for any comparable ``assisted or unassisted'' unit in the building.

Comments argue that owner rents for assisted units should not be

used to show market rent.

f. Administration of Comparability. Comments remark that

determination of comparability is an additional administrative burden

for the HA, and wastes program administrative resources.

Comments note that the comparability requirement is no longer

limited to the certificate program. The new rule will require HAs to

determine rent reasonableness in both the certificate and voucher

programs. In the past, HUD justified lower fees for administration of

the voucher program on the ground that an HA does not have to perform

rent reasonableness. Under the new rule, HAs will now incur additional

costs to perform comparability for the voucher program. Comments

recommend that HUD should not reduce the administrative fee, or should

increase the fee.

Comments note that Section 8 rent setting is more complicated than

in private transactions, because Section 8 rent is subject to HUD and

HA regulation.

Comments state that HUD should increase monitoring of rent

reasonableness if there is more than one HA operating in a

jurisdiction. HUD should prevent landlords from playing HAs against

each other to increase the rent.

Some comments state that an owner should certify that rent is no

more than rent the owner charges for a comparable unit in the building

or complex. Comments state that an HA should presume that the rent for

a Section 8 unit is reasonable unless rent is higher than rent for a

comparable non-Section 8 unit in the building.

Comments state that non-profit owners charge a lower rent for

families who do not receive Section 8 subsidies. These owners want to

charge a neighborhood comparable rent to Section 8 participants. The

comment recommends that an owner should be allowed to charge a higher

rent for Section 8 tenants than for market rate tenants if comparable

rents are charged in the neighborhood.

g. Comparability: Other Issues. Comments express concern on how

implementation of rent reasonableness may affect existing tenancies.

Comments ask HUD to clarify how rent reasonableness applies to existing

voucher tenancies. Comments ask HUD to clarify when and how voucher

landlords can raise the rent.

By law, an HA may serve as contract administrator of units owned by

the HA. Because of the evident conflict between the HA's proprietary

interest and the responsibility for determining if the landlord's rent

is reasonable, HUD determines whether rent of HA-owned units is

reasonable. Comments state that comparability should be determined by

the HUD field office economist rather than the Secretary.

The proposed rule provides than an HA must ``assist'' the family in

negotiating reasonable rent. Comments ask what assistance must be

provided.

3. Comparability: HUD Response

a. Use of Comparability. By law, rents for voucher units must be

``reasonable in comparison with rents charged for comparable units in

the private unassisted market'' (or for units assisted under the

Section 8 certificate program) (42 U.S.C. 1437f(o)(10)(A)). The HA must

review all initial rents or rent increases, and must determine whether

the rent requested by an owner is reasonable.

A public housing agency shall review all rents for [voucher]

units * * * (and all rent increases for [voucher] units.* * *) to

determine whether the rent (or rent increase) requested by an owner

is reasonable. If the public housing agency determines that the rent

(or rent increase) for a unit is not reasonable, the agency may

disapprove a lease for such unit. (42 U.S.C. 1437f(o)(10)(A))

Under this law, the rent reasonableness requirement must be applied in

the voucher program. Rent reasonableness may not be restricted to the

certificate program as suggested by some public comment.

In the certificate program, by law rent adjustment is subject to

comparability. ``Adjustments'' may not result in ``material

differences'' between rent for a Section 8 assisted unit and rent for

[[Page 23829]]

comparable unassisted units (42 U.S.C. 1437f(c)(2)(C)). The adjusted

rent may not exceed ``the rent for a comparable unassisted unit of

similar quality, type and age in the market area'' (42 U.S.C.

1437f(c)(2)(A)). By this HUD regulation, comparability applies both to

initial rent to owner and rent to owner as adjusted during the life of

the assisted tenancy (Sec. 982.503(a)).

Under this rule, comparability for a voucher or certificate tenancy

limits the maximum ``rent to owner''--the amount of rent payable to the

owner in accordance with the lease (Sec. 982.4). Rent to owner does not

include any allowance for tenant-paid utilities. By contrast, the fair

market rent limit (for a regular tenancy under the Section 8

certificate program) is a limit on the initial ``gross rent''--the

total amount of the rent to owner plus any allowance for tenant-paid

utilities.

In the regular certificate program, the initial rent is subject to

both limits: initial rent to owner must be reasonable, and the total of

the rent to owner plus any utility allowance may not exceed the fair

market rent. In a voucher or over-FMR tenancy, the initial rent to

owner must be reasonable. However, the fair market rent is not used as

a restriction on the rent. Instead, the fair market rent is used as a

limit on the ``payment standard''--the maximum subsidy for a family.

Comparability review by the HA prevents owners from charging

Section 8 families more than market rents charged for private market

tenants. Experience in operation of the Section 8 programs shows that

without this control, the availability of the Section 8 subsidy

encourages and enables owners to charge more than a normal market rent.

A Section 8 family may lack the motive, knowledge or leverage to

negotiate a market rent. For a regular certificate tenancy, the

participant has no economic motive to limit the amount of rent paid to

an owner, since the amount of the rent paid to the owner does not

affect the family's share of rent. A higher rent is covered by a higher

Federal subsidy. In a voucher or over-FMR tenancy a higher rent

increases the family's out of pocket payment. Nevertheless, without

comparability, families may agree to excess rents since part of the

rent--often the greatest part of the rent--is paid by the Section 8

subsidy.

The Section 8 program is designed to enable poor families to pay a

fair rent for decent housing, not to subsidize excessive rents or

profits. High rents waste Federal subsidy. By requiring reasonable

rents for Section 8 families, this rule attempts to gain the maximum

benefits from use of available program funds.

Comments state that HUD should not require the HA to redetermine

comparability unless the rent increases, and express concern with the

administrative burden of the annual determination. In response to these

concerns, the final rule (Sec. 982.503(a)(2)) only requires that the HA

conduct a redetermination of reasonable rent in two cases:

--Before any increase of rent to owner, or

--If there is a five percent decrease in the published FMR (in effect

60 days before the contract anniversary) as compared with the FMR in

effect one year before the contract anniversary.

In a regular certificate tenancy, rent may increase by application

of the published factor at the annual anniversary, or by a HUD-approved

special adjustment. In an over-FMR or voucher tenancy, rent may

increase by terms of the lease between the owner and the tenant. For

each type of tenancy, the HA must conduct a comparability analysis

before an owner may increase the rent. An increased rent may not exceed

the reasonable rent for unassisted units in the local market.

Market rents may decline. Even absent a rent increase, the current

rent to owner for a program unit--though reasonable at the time of the

last HA comparability determination--may now exceed reasonable rent for

comparable unassisted units rented in the local market. This excess is

a windfall to the owner and results in excess subsidy payment by HUD or

an excess payment by the family. To prevent excess rent in such cases,

the rule will now require that the HA must conduct a comparability

analysis if there is a five percent or greater decrease in the

published FMR in effect 60 days before the contract anniversary as

compared with the FMR rent in effect one year before the contract

anniversary.

The FMR is HUD's estimate of the fortieth percentile rent for

standard units in the local market. A five percent decrease in the FMR

indicates a substantial decrease in market rents, and justifies

requiring the HA to undertake a comparability determination.

Conversely, however, the rule does not require that the HA

automatically and routinely conduct a comparability determination if

the unit rent does not rise, and if there is no fall in the published

FMR for the market. Even if there is substantial decline in local

market rents, signalled by a fall in the FMR, rent for the particular

assisted unit is not reduced unless the comparability analysis shows

that current unit rent exceeds rent for comparable unassisted units.

At any time, HUD may direct the HA to determine comparability for

its program generally or for particular units, though there is no

proposed increase in unit rent or decrease in market rents

(Sec. 982.503(a)(2)(iii)). For example, HUD may exercise this authority

because of concern that program rents are excessive because an HA has

failed to carry out rent comparability in accordance with program

requirements.

The rule also provides that the HA may redetermine reasonable rent

at any time (Sec. 982.503(a)(3)). The HA has discretion to conduct rent

reasonableness analysis for any or all units, though not mandated in

accordance with the rule.

Comparability applies to existing program tenancies, as well as new

tenancies. Application of reasonableness during the lease term is

required by law, and is consistent with provisions of assistance

contracts for existing certificate and voucher tenancies. In the

certificate program, HAP contracts provide that rent adjustments must

be reasonable. In the voucher program, current HAP contracts also

provide that rent paid to the owner must be reasonable.

The HA must keep records to document the basis for each HA

determination, as required under the rule, that the initial and

adjusted rent to owner is reasonable during the assisted tenancy

(Sec. 982.158(f)(7) (for tenant-based programs) and Sec. 983.12(b)(2)

(for PBC program)). In the tenant-based programs, a comparability

determination must be kept for at least three years. In the PBC

program, a comparability determination must be kept during the HAP

contract term and for at least three years thereafter.

b. How HA Determines Comparability. HUD has not adopted comments

recommending that HUD issue extensive and detailed Federally-prescribed

procedures for rental valuation and for resolution of valuation issues.

Instead, the final rule (Sec. 982.503(b)) contains a brief and simple

statement of the basic standards to be applied by an HA in determining

reasonable rent of a unit with Section 8 tenant-based assistance.

Each HA should use appropriate and practical procedures for

determining rental values in the local market. The HA is responsible

for designating qualified HA staff or outside analysts. HAs have

extensive experience in determining rent reasonableness for the

[[Page 23830]]

Section 8 tenant-based programs, and can utilize available techniques

and expertise. An HA is well able to gather and maintain data on rent

values in its local market, or to retain qualified analysts for this

purpose.

An HA's day-to-day operation of a tenant-based program is a prime

source of up-to-date information on private market rentals in the HA

community. In the process of examining and approving rentals for

program participants, the HA receives on-the-ground information on

rents demanded and accepted by local landlords. HA's can maintain

current rental data, and can designate staff or outside specialists

with training and experience in rental valuation.

The determination of rent reasonableness for Section 8 tenant-based

assistance does not call for a special or unusual valuation in

accordance with detailed procedures prescribed by HUD. The central

purpose of comparability is merely to assure that federally subsidized

rents do not exceed rental values in the private market. Each

individual HA should value units so that the HA's determination of

reasonable rent faithfully reflects the characteristics of the Section

8 unit, and the valuation of comparable units in the private unassisted

market.

c. Factors Considered in Valuing Unit. To determine if rent is

reasonable, the HA must compare characteristics of the contract unit

with characteristics of comparable unassisted units. The rule provides

(Sec. 982.503(b) and Sec. 983.256(b)) that an HA must consider:

--Location, quality, size, unit type and age of the contract unit.

--Amenities, housing services, maintenance and utilities to be provided

by the owner of the contract unit in accordance with the assisted

lease.

The proposed rule would have provided that the HA must consider

``any'' owner services. The final rule specifies that the HA may only

consider ``housing'' services (Sec. 982.503(b)(2) and

Sec. 983.256(b)(2)). Comparable rent does not include the value of any

non-housing services provided by the owner to the assisted tenant (for

example, the value of any food or medical services). In determining

comparable rent, rent of any comparable with non-housing services must

be adjusted down to indicate rent of an assisted unit without such

services.

Comments state that an HA should consider local regulations that

affect rent of comparable units. HUD agrees that local laws or

regulations may affect rent of a comparable or subject unit. However,

such effects would be reflected in the comparable rents, and in the

comparison between the comparable and subject. There is no need to add

any special regulatory treatment concerning the effect of local laws or

regulations.

d. Rent Charged by Owner. The proposed rule would have provided

that rent to owner may not exceed rent that the owner is charging for a

comparable assisted or unassisted unit. Public comments state that

comparability should not be based on owner rent for assisted units. On

reconsideration, HUD agrees that the rent for assisted units is not a

persuasive indicator of private market unassisted rents. In renting to

certificate or voucher families, the owner may not be able to match

reduced rents for subsidized units in the same building.

Under the final rule (Sec. 982.503(b)), reasonable rent for a

contract unit is determined by comparison with rents for other

comparable ``unassisted'' units in the local market and the owner's

premises. In the final rule (Sec. 982.4), the term ``reasonable rent''

means a rent that is not more than rent for comparable units in the

private unassisted market, including rent charged by the owner for

comparable unassisted units in the premises.

The final rule does not provide, as proposed, that rent for a

contract unit may not exceed rent charged by the owner for a comparable

``assisted'' unit in the premises. The rule therefore deletes the

requirement for owner certification of this fact. By accepting the HA's

monthly Section 8 payment, an owner certifies that rent for a Section 8

unit does not exceed rent charged by the owner for comparable

unassisted units in the premises (Sec. 982.503(c); Sec. 983.256(d)).

If requested, the owner must give the HA information on rents

charged by the owner for other units in the premises or elsewhere

(Sec. 982.503(c); Sec. 983.256(d)). Comments agree with HUD that the

owner should be required to give the HA information on rents charged by

owner.

B. Other Limits on Rent to Owner

1. New Provisions

The final rule adds new provisions to confirm that owner rents for

some units may be subject to limits in addition to rent reasonableness.

These limits apply:

--To units subject to rent control under local law;

--To units subject to rent restrictions under rules for the HUD HOME

program (HOME Investment Partnerships Program; see 24 CFR part 92);

--To project-based certificate (PBC) units, to ensure that an owner

does not receive excessive subsidy by combining Section 8 assistance

with tax credits or other subsidies.

--At the discretion of the HA, because of other governmental subsidies

in addition to Section 8 assistance.

2. Rent Control

Local rent control may force an owner to reduce the rent to owner

below the HA-determined reasonable rent (or below the fair market rent

for a regular tenancy in the Section 8 certificate program). The rule

provides that the amount of rent to owner may be subject to rent

control limits under State or local law (Sec. 982.511 and

Sec. 983.258).

The new rule confirms that the Section 8 program rule establishes

the maximum rent to owner, but does not establish the minimum rent to

owner. Therefore the rule does not pre-empt local rent control laws

which may prohibit an owner from charging the full comparable rent

otherwise allowed in accordance with requirements of the Federal

program regulation.

3. HOME Rents

Section 8 families may rent units in projects assisted under the

HUD HOME program. Requirements of the HOME program determine the

maximum rents for units in a HOME-assisted project. The Section 8 rule

provides that rent for HOME-assisted units is subject to requirements

of the HOME program (Sec. 982.512(b) and Sec. 983.257(a)).

This rule thus confirms that participation in the Section 8 program

does not relieve or replace rent limits required by the HOME program.

The converse is also true. Participation in the HOME program does not

relieve or replace rent limits required by the Section 8 program.

Rather, for a unit that is assisted both under the HOME program and

under the Section 8 program, the owner is subject both to the HOME and

Section 8 limits on unit rents. As for other Section 8 units, rent for

a HOME-assisted unit must not exceed rents charged by the owner for

comparable unassisted units.

4. Other Subsidies

The new rule provides that an HA may adopt policies requiring a

reduction of the initial rent to owner because of other governmental

subsidies (Sec. 982.512(c) and Sec. 983.257(c)). In some cases the

owner or property may benefit from Governmental subsidies in addition

to Section 8. Such subsidies may flow from the Federal government, or

from a State or local government. The subsidy may take various forms:

such as

[[Page 23831]]

tax concessions or credits, subsidized loans or grants to an owner.

The HA may judge that the combination of Section 8 subsidy with

other subsidies is an excess concentration of public resources, is more

than necessary to induce the owner to provide the housing, or provides

a windfall or excessive profit to the owner. The final rule explicitly

grants the HA discretion to refuse Section 8 initial rents that the HA

deems excessive after considering other available subsidies for the

project, and to require an initial rent below the reasonable rent

otherwise allowed under the program.

Section 8 housing may benefit from federal tax credits allocated by

State housing credit agencies. Section 102(d) of the HUD Reform Act of

1979 (42 U.S.C. 3545 and 3545 note) requires HUD to take into account

other government assistance in determining the amount of Section 8 or

other HUD assistance for ``any housing project.'' Before the HA commits

assistance under the project-based certificate program, HUD or a State

housing credit agency must certify that the combination of Section 8

and other governmental assistance for a project is not ``more than is

necessary to provide affordable housing.''

Departmental regulations provide that in making a certification

under Section 102(d), HUD will consider the aggregate amount of

assistance from the Department and other sources that is ``necessary to

ensure the feasibility of the assisted activity'' (24 CFR 4.13(a)). If

HUD determines that the aggregate amount of assistance is more than

necessary for this purpose ``the Department will consider all options

available to enable it to make the required certification, including

reductions in the amount of Section 8 subsidies'' (24 CFR 4.13(b)). To

implement the limitation of Federal assistance for a project, HUD has

issued administrative guidelines on the ``layering'' of governmental

subsidies (59 FR 9332, February 25, 1994).

The proposed PBC rule would have provided that the initial rents to

owner (contract rent) may not exceed the rents necessary to make the

assisted activity feasible, after taking into account assistance from

other government sources, and that the HA and owner must so certify.

Comments object to the requirement for certification that this standard

is met. The final PBC rule does not include this certification

requirement.

The final PBC rule provides, at Sec. 983.257(b), that:

* * * the HA may only approve or assist a project in accordance

with HUD regulations and guidelines designed to ensure that

participants do not receive excessive compensation by combining HUD

program assistance with assistance from other Federal, State or

local agencies, or with low income housing tax credits.

An owner may receive excessive benefit by combining Section 8

benefits with tax credit or other governmental subsidies. Excess

aggregate subsidy may be eliminated by reducing Section 8 rents or by

reducing tax credits or other governmental subsidies. On the one hand,

a State housing credit agency may reduce the allocation of Federal tax

credits. Alternatively, the HA may exercise its regulatory discretion

to reduce initial Section 8 rents because of tax credits or other

subsidies for the project.

IV. Maximum Subsidy

A. Purpose and Proposed Changes

HUD publishes the fair market rent (FMR) for each market area. The

FMRs are estimates of the cost to rent standard existing housing. In

the Section 8 certificate and voucher programs, the published FMR is

generally the maximum subsidy for a family. However, HUD may approve an

``exception rent'' to allow a higher subsidy. The ``FMR/exception rent

limit'' is the fair market rent or any HUD-approved exception rent.

(Sec. 982.504, and definition of FMR/exception rent limit in

Sec. 982.4.) (In addition to the tenant-based programs, the exception

rent requirements in Sec. 982.504 also apply to PBC (Sec. 983.252(b)).)

For a regular tenancy in the certificate program, the FMR/exception

rent limit is the maximum initial rent (Sec. 982.508(a); see also

Sec. 982.504(a)(2)). The initial rent may not exceed the FMR/exception

rent limit either for the actual size of the unit rented, or for the

``family unit size''--the appropriate unit size for the family

(Sec. 982.508(a)(2); Sec. 982.402(c)(1)). Family unit size is

determined under the HA subsidy standards (Sec. 982.402).

For a voucher or over-FMR tenancy, the FMR/exception rent limit

determines the HA payment standard (maximum subsidy amount)

(Sec. 982.505; see also Sec. 982.504(a)(2)). For the voucher program,

the payment standard may not exceed the FMR/exception rent limit

(Sec. 982.505(b)(1)). For an over-FMR tenancy, the payment standard is

the FMR/exception rent limit (Sec. 982.505(c)(1)).

Under the old certificate rule, an HA was permitted to approve

exception rents up to 110 percent of published FMR for up to 20 percent

of units in the HA certificate program. The HA did not need to ask HUD

permission to approve such exception rents. In addition, HUD could

approve certificate program exception rents for neighborhoods or

special cases. In the voucher program, the HA could set a payment

standard up to a HUD-approved exception rent for the whole HA

jurisdiction. In this rulemaking, HUD proposed to eliminate the

existing exception rent authorities, and to substitute a new uniform

exception rent standard for the tenant-based programs.

Under the proposed and final rule HUD may approve an exception rent

limit for part of the area covered by a published FMR. In all cases,

the approved exception rent limit may not exceed 120 percent of the

published FMR (Sec. 982.504(b)(1)(ii) of final rule)--the statutory

exception rent limit. Within this limit, the final rule allows two

alternative procedures for determining the maximum exception rent.

First, in accordance with prior practice and as provided in the

proposed rule, the final rule provides that HUD may approve an

exception rent that does not exceed the 40th percentile of rents to

lease standard units in the exception rent area. Under this method, the

40th percentile rent is determined by the same method as is used to

establish the published FMR for the whole FMR area.

Second, the final rule adds a new method for determining the

maximum approvable exception rent. The final rule provides that HUD may

approve an exception rent if the exception rent does not exceed the FMR

times a fraction comprised of the median rent of the exception rent

area divided by the median rent of the entire FMR area. For this

purpose, HUD will use decennial census data and other available

statistically valid information to determine the median rent for the

exception rent area and FMR area (Sec. 982.504(b)(1)(ii)(B).)

The final rule also provides that HUD will not approve an area

exception rent unless HUD determines that an exception rent is needed

for either of two specific program reasons (Sec. 982.504(b)(1)(iii)):

--To help families find housing outside area of high poverty, or

--Because a high percentage of certificate or voucher holders have

trouble finding housing for lease under the tenant-based program within

the term of the certificate or voucher.

[[Page 23832]]

The total population of exception rent areas in an FMR area may not

include more than 50 percent of the population of the fair market rent

area (Sec. 982.504(b)(1)(iv)).

A HUD-approved area exception rent applies to any family that rents

a unit with tenant-based assistance in a HUD-approved exception rent

area (Sec. 982.504(b)(1)(i)). The rule does not limit the number of

exception rent tenancies in these areas.

In addition, the final rule provides that for a regular certificate

tenancy, the HA may approve an exception rent up to 120 percent of the

published FMR, as a reasonable accommodation for a disabled family

member (Sec. 982.504(b)(2)).

B. FMR/Exception Rent Limit: Comments

1. Certificate Program: Elimination of HA Exception Authority

Some comments argue that HUD should not change the old exception

rent regulation. Other comments state that the new exception rent

system is flexible and offers more choice for clients.

Comments object to losing the HA's 20 percent exception authority

in the certificate program. Comments recommend increasing the

percentage of exception units.

Comments complain that the new rule restricts HA flexibility. They

state that an HA should retain discretion to allow FMR exceptions on a

community-wide or unit-by-unit basis. The comments state that the old

certificate system allows the HA to consider local market conditions

and circumstances of participating families. The HA needs discretion to

meet special needs or unusual circumstances. Sometimes the HA needs to

grant an exception rent for a specific unit because of special family

needs.

Comments suggest that an HA may reduce arbitrary variation in HA

exception rent approval by adopting objective criteria for determining

when to grant exception rents. The HA administrative plan should

include provisions on HA approval of exception rents. Inclusion of HA

exception rent policy in the administrative plan prevents arbitrary or

abusive action by the HA.

Comments note that removal of HA exception rent authority hampers

ability of certificate-holders to lease units. The HA loses landlords

when the FMR is low and rents are high. A tight market forces tenants

into poor neighborhoods. Under the old rule, an HA can use the 20

percent exception authority so program families can lease in new areas.

However, an HA comment states that the HA does not allow exception

rents since there are many units available under the FMR.

2. Over-FMR Tenancy

Some public comments concern the relation between exception rent

limits on maximum subsidy, and the new rules that allow some

certificate families to pay a higher rent. In this type of tenancy, the

maximum subsidy is capped at the FMR limit, but the family can pay the

owner rent that exceeds the FMR limit. (In the proposed rule, this is

called an ``excess rent'' tenancy. In the final rule this is called an

``over-FMR'' tenancy.) By law, the HA may not approve such tenancies

for more than 10 percent of ``incremental'' units in the HA program.

Comments state that the over-FMR tenancy is not an adequate

substitute for the 20 percent exception rent authority. Over-FMR

tenancies are limited to 10 percent of the HA program and families who

can afford to pay more than the FMR. Poor welfare families will not

qualify for excess rent tenancy. According to the comments, the over-

FMR tenancy substitutes for the individual exception rent authority

under old rule. An HA needs authority to approve higher rents for more

than 10 percent of incremental units.

3. Exception Rent: HUD Approval

Comments note that the new rule requires HUD approval for all

exception rents. The law does not require HUD approval for exception

rents up to 10 percent over FMR. Comments claim that elimination of HA

exception rent authority is contrary to law.

Comments state that communities should not be required to submit an

unusual amount of data in requesting approval of an exception rent. An

HA cannot afford to hire consultants for each FMR change.

Comments recommend a 30 day deadline for HUD to review an HA

exception rent request. If HUD misses the deadline, the HA request

should be automatically approved.

Comments ask HUD to clarify some aspects of the new exception rent

system. HUD should specify that the new exception rent authority

replaces the former HA authority to approve exception rents without HUD

approval. HUD should explain how deletion of 20 per cent authority is

phased-in, and whether prior approved exceptions are grandparented.

Comments note that the new system only allows an exception rent for

a unit located in an approved exception rent area. The new system may

eliminate incentive for an owner to improve property over the HQS.

4. Exception Rent: New Procedure

Comments state that the new exception rent procedure is too

complex. The authority to approve an exception rent is not based on

individual family circumstances. HUD should not require the HA to

document the rent level representing a given percentile of the local

market.

C. FMR/Exception Rent Limit: New Rule

1. Approval of Exception Rent

a. New rule. Fair market rents (FMRs) are published annually by

HUD. An ``exception rent'' is a maximum rent subsidy in excess of the

published FMR. Under the old rule, an HA was authorized to approve

exception rents up to 110 percent of the FMR for up to 20 percent of

units under the ACC (annual contributions contract between HUD and an

HA).

The new rule (Sec. 982.504(b)) permits two types of exception rent:

--An exception rent for part of the FMR area. Such exception rents must

be approved by HUD. Area exception rents apply to all three types of

program tenancy: a regular certificate tenancy, a voucher tenancy and

an over-FMR tenancy.

--For a regular certificate tenancy only, an exception rent granted by

the HA as a reasonable accommodation for a person with disabilities.

b. Area Exception Rent. The final rule provides that an HA may

request exception rent approval for a part of the fair market rent area

designated as an ``exception rent area'' (Sec. 982.504(b)(1)). HUD may

approve an exception rent for all units, or for all units of a given

size (number of bedrooms), leased by program families in a HUD-approved

exception rent area. However, the total population of exception rent

areas in a fair market rent area may not include more than 50 percent

of the population of the fair market rent area

(Sec. 982.504(b)(1)(iv)).

The amount of the HUD-approved exception rent is subject to two

restrictions. First, the exception rent may not exceed 120 percent of

the published fair market rent (Sec. 982.504(b)(1)(ii)(A)). For a

regular tenancy in the Section 8 certificate program, the maximum

monthly rent is 120 percent of the published FMR (42 U.S.C.

1437f(c)(1)). In the voucher program, the payment standard must be

``based on'' the published fair market rent (42 U.S.C. 1437f(o)(1).

Under the rule (Sec. 982.505), the 120 percent of FMR

[[Page 23833]]

limit is the maximum payment standard for a voucher or over-FMR

tenancy.

Second, in addition to the 120 percent limit, the exception rent

may not exceed a second limit, designed to test whether there is a need

for higher rental subsidy in a proposed exception rent area. Under the

proposed rule, HUD would have applied the same methodology that is used

to determine the FMR for the whole FMR area. FMRs are currently set at

the 40th percentile rent--the rent level that includes rents for 40

percent of standard quality units renting in the local housing market

(Sec. 888.113(a)). When the proposed rule was published in February

1993, FMRs were set at the 45th percentile rent. The proposed rule

would have provided that the exception rent may not exceed the 45th

percentile rent as determined by the methodology used to determine the

published FMR.

Under the final rule, the HUD field office may approve an area

exception rent for a high-rent portion of the FMR area. HUD may use one

of two alternative methods for determining the maximum area exception

rent. The area exception rent may be based either: (1) on the 40th

percentile rent for the exception rent area, or (2) on the relationship

between the median rent of the exception rent area as compared with the

median rent for the whole FMR area (Sec. 982.504(b)(1)).

Using the first method, the exception rent may not exceed the lower

of:

--120 percent of the published FMR, or

--The 40th percentile rent for the exception rent area.

Using the second method, the exception rent may not exceed the

lower of:

--120 percent of the FMR, or

--The published FMR times a fraction comprised of the median rent of

the exception rent area divided by the median rent of the entire FMR

area.

When the second method is used, HUD compares exception area median

rent to median rent for the entire FMR area. The information needed for

this comparison can be obtained easily from the decennial United States

census. By contrast, information on the 40th percentile rent level

relationships for the FMR and exception rent areas is not available in

census publications or tabulations in the same detail used by HUD to

compute the FMR.

Under the proposed rule and existing practice, an HA would have

been required to submit survey data which justifies the HA's request

for HUD approval of an exception rent. To secure exception rent

approval, the HA would have been forced to gather and submit survey

data showing the 40th percentile rent for the proposed exception rent

area. The new rule relieves the HA of the obligation and burden of

supplying rental survey data to support its request for exception rent

approval.

The new rule provides instead that HUD may use decennial census

data and other available statistically valid information to determine

the median rent for the exception rent area and FMR area. HAs usually

lack the resources and statistical know-how to conduct adequate rental

surveys for determination of percentile rent. Moreover, the random

digit dialing technique that is used to determine the FMR does not work

well for parts of FMR areas because of the large number of calls, and

therefore the associated high cost, that is required to obtain an

adequate sample size for the exception rent area.

The determination that exception area rents are more expensive than

rents for the FMR area as a whole (either by median rent comparison or

by determination of the 40th percentile rent) does not itself show that

there is a programmatic justification for a higher subsidy. The final

rule (Sec. 982.504(b)(1)(iii)) provides that HUD will not approve an

exception rent unless HUD determines that an exception rent is needed

either:

--To help families find housing outside areas of high poverty, or

--Because a high percentage of certificate or voucher holders have

trouble finding housing for lease under the program within the term of

the certificate or voucher.

An area exception rent only applies if a family selects and rents a

unit within a HUD-approved exception rent area (Sec. 982.504(b)(1)(i)).

There is no limit on the number or percentage of area exception rent

units in the HA program. However, the total population of exception

rent areas in an FMR area may not include more than 50 percent of the

population of the fair market rent area (Sec. 982.504(b)(1)(iv)).

c. Regular Tenancy: Accommodation for Person With Disabilities. The

final rule (Sec. 982.504(b)(2)) provides that on request from a family

that includes a person with disabilities, the HA must approve an

exception rent of up to 120 percent of the fair market rent if

appropriate as a reasonable accommodation for the needs of a such

person arising from such person's disability. This authority to approve

a higher rent only applies to a regular certificate tenancy, and does

not apply to a voucher tenancy or over-FMR certificate tenancy.

2. Exception Rent: New Rule--HUD Response

HUD has not adopted the recommendation to retain the HA 20 percent

exception authority in the old certificate rule, or to retain a broad

authority for HAs to grant exception rents for neighborhoods or special

cases. Instead, the rule is designed to apply a uniform and equitable

exception standard for all areas and all cases (with a limited

exception to accommodate the special needs of a person with

disabilities). This standard is applied across the whole universe of

the HA tenant-based programs--to establish the maximum initial rent to

owner in a regular certificate tenancy, or the payment standard for a

voucher or over-FMR tenancy.

Under the old voucher rule, HUD only allowed the use of

``community-wide'' exception rents to determine the voucher payment

standard: certificate exception rents that apply to the whole HA

jurisdiction. Under the new rule, the same exception rent limit applies

for certificates and vouchers. For both tenant-based programs, and for

any form of tenancy, HUD may approve an exception rent for a portion of

the HA jurisdiction. Some comments support this change, noting that

exception rents are critical to success of the certificate and voucher

programs.

As noted above, some comments claim that elimination of the HA's 20

percent exception authority limits family opportunity to search for

units in better areas--nearer to schools or jobs, and outside impacted

areas with a high concentration of poor or minority families. However,

under the new rule HUD may approve area exception rents so families can

rent more expensive units in better areas. The granting of an area

exception rent allows families to access decent units in the exception

rent area. There is no percentage limit on the number of assisted

families that may rent in exception rent areas.

In a regular certificate tenancy, the family may rent a unit up to

the exception rent limit. Such rentals do not count against the

statutory limit on the percent of certificate families paying in excess

of the FMR/exception rent limit under an over-FMR tenancy.

HUD has not accepted a comment urging HUD to phase in elimination

of an HA's 20 percent exception rent authority. There is no need for a

phase-in since the new procedure does not reduce the subsidy for

existing program tenancies. The new provision only applies to lease

approvals after the regulation effective date. In the regular

certificate program, the FMR/exception

[[Page 23834]]

rent limit only operates as a constraint on rent at the beginning of

the lease term, but does not affect rent adjustments during the lease

term. In a voucher or over-FMR tenancy, the family is protected against

a drop of the payment standard during the lease term.

Under the new rule, HUD may approve an exception rent for a

``designated'' part of the FMR area. Comments state HUD should define

what this means. HUD believes there is no need for further definition.

Under the rule, HUD may designate any part of the FMR area.

The rule specifies that a designated exception rent area may not

include more than 50 percent of the FMR area population. If there is a

need for higher rents and subsidy in a larger portion of the FMR area,

HUD will consider whether the available data indicate that HUD should

adopt a higher published FMR, instead of adopting a higher ``exception

rent'' for more than half of the FMR area.

V. Minimum Rent: Family Share of Rent

In the certificate and voucher programs the family must contribute

at least 10 percent of gross income as rent for the unit (for

certificates: 42 U.S.C. 1437a(a)(1) and 1437f(c)(3)(A); see also 24 CFR

5.613 (61 FR 54502, October 18, 1996); for vouchers: 42 U.S.C.

1437f(o)(2); see also Sec. 982.507 (regular certificate tenancy);

Sec. 982.505(b)(2)(ii) (vouchers); Sec. 982.505(c)(2) (over-FMR

tenancy)). Comments state that HUD should raise the ``minimum rent''

from 10 percent of gross income to 14 percent.

HUD has not raised the minimum rent. The minimum rent percentage is

determined by the statute.

For several years, temporary laws have provided that a Section 8

assisted family must pay a ``minimum monthly rent'': the minimum share

of rent that is not covered by Section 8 subsidy (110 Stat. 40, sec.

402(a) of P.L. 104-99, 1/26/96, as amended by 110 Stat. 2892-2893, sec.

201(c) of P.L. 104-204, 9/26/96). The temporary minimum rent

requirement applies in addition to standing statutory requirements that

specify the amount of the rent a Section 8 (non-voucher) family is

``required to pay'' (42 U.S.C. 1437f(c)(3)(A)), and the amount of

subsidy for a voucher family (42 U.S.C. 1437f(o)(2)). The Congress may

extend temporary minimum rent requirements to future years. The rule is

revised to provide for enforcement of minimum rents as enacted by the

Congress.

In an over-FMR tenancy, the initial gross rent (rent paid to owner

plus allowance for tenant-paid utilities) exceeds the FMR limit

(Sec. 982.4). The final rule provides that the subsidy payment for an

over-FMR tenancy may not exceed gross rent minus the minimum rent as

required by law (Sec. 982.505(c)(2)(ii)). For a regular tenancy, the

final rule provides that the subsidy payment equals the gross rent

minus the higher of the total tenant payment or the minimum rent as

required by law (Sec. 982.507(b)).

In a voucher tenancy, the subsidy payment may not exceed gross rent

minus the minimum rent (minimum family share) (Sec. 982.505(b)(2)). In

the voucher program, the minimum rent is the higher of (1) 10 percent

of gross income (42 U.S.C. 1437f(o)(2)) or (2) a higher minimum rent as

required by law. For each type of tenancy, the minimum rent requirement

assures that the family must pay out-of-pocket at least a minimum share

of actual rent during the course of the tenancy.

In the regulatory formula for determining the amount of subsidy in

an over-FMR tenancy (Sec. 982.505(c)(2)), total tenant payment is

deducted from the payment standard to calculate the maximum subsidy

(payment standard minus total tenant payment). Minimum rent is deducted

from the actual unit rent (gross rent) to determine the minimum family

share. The actual subsidy for a family is the lesser of the amounts

derived from these two calculations.

For a voucher or over-FMR tenancy, the assistance formulas also

assure that the subsidy does not exceed the amount needed to support

the actual reasonable rent for the unit. Subsidy may not exceed the

difference between the ``gross rent'' and the minimum rent

(Sec. 982.505(b)(2)(i) (voucher tenancy) and Sec. 982.505(c)(2) (over-

FMR tenancy)). ``Gross rent'' is the sum of the actual rent to owner

and the HA allowance for tenant-paid utilities (definition at

Sec. 982.4). Rent to owner must be reasonable (Sec. 982.503(a)).

VI. Certificate Program: Over-FMR Tenancy

A. New Type of Tenancy

For the first time under this rule, some families in the

certificate program may choose to rent units that rent for more than

the fair market rent (FMR)/exception rent limit. In the proposed rule

this type of tenancy was called an ``excess rent tenancy.'' In the

final rule this type of tenancy is called an ``over-FMR tenancy''

(Sec. 982.4).

The name used in the proposed rule may be misleading, since the

phrase ``excess rent tenancy'' suggests that the rent is excessive. By

law and HUD regulation, rent paid to the owner must be reasonable--both

in relation to comparable market rents and to family financial

resources. Thus the rent may not be ``excessive.'' The phrase ``over-

FMR tenancy'' better indicates that the family pays a rent that exceeds

the FMR limit--the cap on gross rent in the regular certificate

program.

By allowing a family to rent above the FMR/exception rent limit,

this regulatory change enlarges the pool of available housing that can

be rented by a family under the certificate program, and may enable the

family to pick a unit that better fits the family needs. A family that

enters an over-FMR tenancy pays more than the statutory formula rent

(``total tenant payment'') that otherwise defines the family share of

unit rent. However, as for all housing assisted in the certificate and

voucher programs, the total rent to owner may not exceed the reasonable

market rent. Moreover, as for all housing assisted in the certificate

program, the fair market rent limit is the maximum initial subsidy.

(The initial subsidy payment is the difference between the fair market

rent limit and the formula rent paid by the family.)

In the final rule, the term ``regular tenancy'' is used to

distinguish the basic form of certificate program tenancy used since

the beginning of the certificate program from an ``over-FMR''

tenancy,'' newly authorized by this rule. A regular tenancy is defined

as a certificate program tenancy ``other than an over-FMR tenancy''

(Sec. 982.4).

In a regular tenancy, the initial rent (the rent at the beginning

of the lease term, including the HA allowance for tenant-paid

utilities) may not exceed the FMR/exception rent limit. The family pays

the portion of rent determined by the statutory formula (42 U.S.C.

1437f(c)(3)(A) and 1437a(a)(1)), generally 30 percent of adjusted

income. The family is prohibited from paying a higher share of the

rent. The subsidy covers the difference between the actual unit rent

and the formula rent paid by the family.

Both in the voucher program and in an over-FMR tenancy in the

certificate program, the family may rent a unit for more than FMR/

exception rent limit. The family pays the portion of rent not covered

by the HUD subsidy.

For a tenancy in the voucher program, the HA sets the maximum

subsidy level, called the ``payment standard''. The payment standard

may not exceed the FMR/exception rent limit. Unless HUD approves a

lower percent, the payment standard may not be less than 80 percent of

the FMR/exception rent limit.

[[Page 23835]]

For an over-FMR tenancy in the certificate program, the maximum subsidy

equals the FMR/exception rent limit. (For any tenancy in the

certificate and voucher programs, the actual subsidy payment generally

equals the maximum subsidy minus 30 percent of the family's adjusted

income.)

B. Over-FMR Tenancy: Comments

1. General Effect of Rule

Some comments welcome regulatory change to allow over-FMR tenancies

in the certificate program. By permitting use of an over-FMR tenancy,

the certificate program operates more like the voucher program. The

over-FMR tenancy opens housing opportunities for program participants.

The over-FMR tenancy helps families, including large families, that

cannot find suitable units at rents under the FMR.

Comments state that the over-FMR tenancy removes the need for

``side payments'' by a family. (``Side payments'' are illegal family

rental payments to a Section 8 landlord that exceed the tenant rent

share (``tenant rent'') defined by federal law.) Comparability assures

that rent paid to the owner is not excessive. Comments assert that the

tenant-based programs need flexibility for higher rental payments.

2. Objections to Over-FMR Tenancy

Other comments object to the over-FMR tenancy. Comments state that

HUD should not allow an assisted family to pay a higher share of family

income. Authorization for the over-FMR tenancy casts the HA as a

financial manager for the tenant. An over-FMR tenancy is not consistent

with the low-income program. A tenant may overextend financially in

agreeing to a higher rent. Family income may decrease after rental of

the unit. The tenant may be forced to move. The HA will have a

financial burden if a family is forced to move.

HA comment indicates that there may be little need to allow the

over-FMR tenancy. An HA states that there are many units available

within the FMR in the HA's local housing market. Because of deflation,

Section 8 tenants have a wider choice of housing.

Comments state that the over-FMR tenancy encourages fraud, and non-

reporting of family income by participants. Owners will try to collect

extra money. The over-FMR tenancy will make owners greedy, and cause

price escalation in tight markets. The over-FMR tenancy may be

``discriminatory.'' Landlords will favor over-FMR tenants. The

permission to allow an over-FMR tenancy limits the ability of other

families to find housing in the open market.

Comments state that the over-FMR tenancy will be an administrative

burden. The HA must determine residual income, and track over-FMR

tenancies. HA's cannot explain the over-FMR tenancy to families, and

the families will not understand how such a tenancy works. The new rule

will create a new certificate sub-program rather than simplifying

administration by combining and conforming the certificate and voucher

programs, the stated objective of the conforming rule.

C. Over-FMR Tenancy: 10 Percent Limit

1. Law

The law provides that an HA may not approve over-FMR tenancies

(``excess rentals'') for more than 10 percent of ``incremental rental

assistance'' (42 U.S.C. 1437f(c)(3)(B)(ii)). To implement this

statutory restriction, the proposed rule would have provided that the

number of over-FMR tenancies may not exceed 10 percent of ``incremental

units'' in the HA certificate program. Incremental refers to additional

program units not provided for families previously receiving Section 8

assistance.

2. Comments

Comments state that the HUD rule should not restrict the number of

over-FMR tenancies in an HA program. HUD should not limit HA authority

to approve over-FMR tenancies to 10 per cent of the HA's incremental

units. The 10 percent limit is arbitrary and too low.

Comments also state that the same requirements should apply to

certificates and vouchers. The certificate rule should follow the

voucher program. In the voucher program, there is no limit on the

number or percentage of units that rent above the voucher payment

standard. The voucher program should be the model for a future combined

tenant-based program. Different certificate and voucher limits on

family share of rent confuse families and landlords.

Comments state that the rule should allow over-FMR tenancy for all

families. The HA should not have to approve over-FMR tenancies on a

unit by unit basis. Tenants and owners will not know if HA exception

authority is available. Comments ask how an HA determines whether to

approve a family's request within the 10 percent limit.

Comments note that the opportunity for an over-FMR tenancy opens up

a tight housing market. Availability of over-FMR tenancy for all units

would increase family opportunities. The 10 percent maximum restricts

family choice. All families should have the same choice. An over-FMR

tenancy permits a family to rent a single family dwelling instead of an

apartment.

Comments state that there is no need for a 10 percent cap. Rent

paid by a family must be reasonable and affordable. Allowing Section 8

assistance for an over-FMR tenancy does not increase the amount of HUD

subsidy. The family pays the excess over FMR.

The meaning of ``incremental'' units is not clear, and should be

stated in plain language.

Under the old rule, an HA could approve exception rents for up to

20 percent of units under ACC. However, over-FMR tenancies are only

permitted for 10 percent of ACC units. Comments claim that the proposed

rule reduces authority to grant exceptions from 20 percent to 10

percent of ACC. Comment asks if pre-rule exception rents count against

the 10 percent limit.

3. HUD Response

HUD agrees with commenters that the 10 percent limit is an

arbitrary restriction on the HA's authority to approve over-FMR rentals

in the certificate program. As remarked in the comments, the

opportunity for an over-FMR tenancy opens up new housing choices for an

assisted family, but does not increase the maximum federal subsidy. HUD

is, however, constrained by current law, under which such rentals may

not exceed 10 percent of ``incremental'' units in the HA certificate

program (see 42 U.S.C. 1437f(c)(3)(B)(ii)).

In HUD appropriations practice, incremental assistance generally

refers to appropriated funding for units which increase the aggregate

supply of federally assisted housing, as contrasted with continued

funding for previously assisted units or families. The 10 percent limit

is applied to the base of incremental units in the HA program. Under

the proposed rule, the number of incremental units under the ACC

(consolidated ACC) would be calculated by subtracting ACC units for

families previously assisted under other Section 8 or federal housing

programs. Under the final rule (Sec. 982.506(a)(2)), all certificate

units are counted as incremental except units provided to replace units

for which HUD provided tenant-based program funding designated for

families residing in section 8 project-based housing.

[[Page 23836]]

D. Over-FMR Tenancy: Affordability of Rent (Maximum Family Share)

1. Law and Regulation

In a regular Section 8 certificate tenancy, a family must rent a

unit below the FMR limit, and a statutory formula specifies the family

share of the rent (called ``total tenant payment'') as a percentage of

family income (42 U.S.C. 1437f(c)(3)(A) and 1437a(a)(1)). The family

usually pays 30 percent of adjusted income toward the total unit rent.

In an over-FMR tenancy, a family may rent a unit over the FMR

limit. The family pays a higher percentage of income towards the total

unit rent than otherwise allowed by the statutory Section 8 rent

formula. The law provides that a family may not enter an over-FMR

tenancy (agree to pay more than 30 percent of income) unless the HA has

determined that:

* * * the rent for the unit and the rental payments of the

family are reasonable, after taking into account other family

expenses (including child care, unreimbursed medical expenses, and

other appropriate family expenses). (42 U.S.C.

1437f(c)(3)(B)(i)(II))

The proposed rule would have provided, both for vouchers and for an

excess rent (over-FMR) tenancy, that the initial family share of rent

may not exceed half of a family's adjusted income. Under the proposed

rule, the other half of family income must not be needed for rent, and

remains available (as ``residual income'') for family expenses other

than housing--including costs of food, child care, unreimbursed medical

expenses and other appropriate family expense.

The final rule does not prescribe the percent or amount of residual

family income that must be left over for non-housing expenses in an

over-FMR tenancy. The HA decides how to implement the statutory test.

The final rule grants the HA maximum authority to determine whether the

family share of rent at the beginning of the lease term is reasonable.

In making this determination, the HA must consider amounts remaining

for other family expenses, such as child care, unreimbursed medical

expenses, and other appropriate family expenses as determined by the HA

(Sec. 982.506(b)(2)).

In the proposed rule, the residual income requirement would have

applied to rentals under the voucher program, as well as over-FMR

tenancies (called ``excess rent'' tenancies in the proposed rule) under

the certificate program. In the final rule, the revised residual income

requirement only applies for an over-FMR tenancy in the certificate

program. There is no such statutory or regulatory requirement for

rentals under the voucher program.

2. Comments

a. Objections to Affordability. Some comments object to the

affordability (residual income requirement) for an over-FMR tenancy

under the statute and proposed rule. These comments assert that the

family should be allowed to pay a higher rent.

Comments object that the affordability test limits use of the over-

FMR tenancy to families that can afford to pay the rent. The residual

income requirement excludes families that are too poor to locate an

affordable unit. HUD should not deny assistance for rental of a unit

because a family would have to pay more than half of income for rent,

if the family would have to pay even more on the private market.

The family should choose how much to pay for rent, and whether a

unit is affordable. The HA should not be responsible for determining if

the rent is affordable for the family. The family should have freedom

of choice. The family should not be prevented from renting above the

payment standard because the rent does not leave enough residual income

for non-rental purposes. The family should decide its own priorities.

The program should not decide maximum housing cost in relation to

family income, and should not require rent reasonableness.

Comments state that the proposed 50 percent residual income

requirement is arbitrary. The rule should not require that participant

has 50 percent for other costs. If an HA believes the family cannot

afford the unit, the HA should counsel the family.

Comments also indicate that the HA cannot enforce the residual

income requirement. Residents will choose units beyond their means. A

residual income requirement is not needed since the HA performs rent

reasonableness. Other comments urge that HUD should not require either

affordability or rent reasonableness.

b. Defining Affordability. Comments argue that the HA should limit

the rent paid by a family. The HA should not approve a unit unless the

family can afford the rent.

Some comments favor a residual income test that prevents a family

from renting a unit if the family will not have income to cover other

everyday living expenses. A family needs residual income for other non-

rent family necessities. A residual income test avoids problems between

the tenant and owner. A tenant who cannot afford the rent may break the

lease.

Comments express different views on the appropriate test of

residual income. Some comments indicate that an HA should have

discretion whether to approve an over-FMR tenancy if a family is paying

more than half of income for rent. Other comments state that the rule

should not allow rent over 50 percent of income. Comments welcome the

proposed change requiring that a voucher family must have 50 percent

residual income after payment of its rent.

Comments state that a family should not be permitted to pay as much

as 50 per cent of income (adjusted income) for rent. A family paying 50

percent (of gross income) would qualify for statutory federal

preference in admission to assisted housing. (Note: federal preference

requirements have been suspended.) Comments state that it is disturbing

and absurd to provide federal preference for admission of a family with

a 50 percent rent burden, but allow a program rent burden exceeding 50

percent. Comments note that a family that qualifies for rent burden

preference (because rent is more than 50 percent of income) cannot meet

the residual income test unless the family moves or rent is reduced.

Comments recommend that HUD should allow an HA to:

--Limit maximum rents: Rent cannot exceed 10 or 20 percent over the

FMR/exception rent.

--Require affordability: Rent cannot exceed 50 percent or 40 per cent

of adjusted income.

c. Affordability: Other Comments. Comments state that the

regulatory affordability test should consider family payments for taxes

and social security. HUD adjusted income does not reflect tax payments.

Families pay a higher percent of ``real'' (after tax) income for rent.

On the other hand, comments note that adjusted income does not count

all family resources, such as student loans.

Comments state that there should be a uniform affordability policy

for certificates and vouchers. The same limit should apply for both

tenant-based programs. Comments object to HUD's proposal to apply a

residual income test in the voucher program, as well as an over-FMR

tenancy in the certificate program.

The rule should clarify what happens if family does not maintain

required residual income.

Comments note that the affordability test is an administrative

burden for the HA. The affordability (residual income) requirement is

confusing.

[[Page 23837]]

3. How HA Determines Affordability

Program subsidy pays a part of the rent. The balance is paid by the

family. To decide, as required by law, whether the family can afford

the housing, the HA must examine whether the family share of the rent

(``rental payments of the family'') is reasonable in relation to family

resources and other family expenses. By contrast, the rent

reasonableness test examines whether the rent paid to an owner is

reasonable in relation to market rents for comparable units, not

whether the rent is reasonable for an individual assisted family.

The final rule (Sec. 982.4) adds the defined term ``family share'':

``the portion of rent and utilities paid by the family''. Family share

is calculated by subtracting the housing assistance payment from the

gross rent (rent to owner plus any utility allowance)

(Sec. 982.515(a)).

The term ``family share'' replaces the equivalent term ``tenant

contribution'' in the proposed rule. Gross rent is the total of rent to

owner plus any allowance for tenant paid utilities. Family share is the

family-paid portion of gross rent. The definition of family share as

including tenant-paid utilities is consistent with the traditional use

of gross rent to determine the family rent contribution (total tenant

payment) for Section 8 or public housing.

The rule provides that the HA may not use housing assistance

payments or other program funds (including any administrative fee

reserve) to pay any part of the family share (Sec. 982.515(b)). Payment

of the family share is the responsibility of the family.

The proposed rule prescribed a specific formula for an HA

determination that family rental payments are ``reasonable.'' The

proposed rule would have provided that the family share of rent (tenant

contribution) must leave at least 50 percent of adjusted income to meet

other family expenses (``residual income''). In the proposed rule, this

requirement would have applied both to an over-FMR tenancy, and to a

voucher tenancy.

The final rule (Sec. 982.506(b)(2)) essentially tracks the

statutory requirement. The HA may not approve an over-FMR tenancy

unless the HA determines that the initial family share is reasonable.

In making this determination, the HA must take into account

other family expenses, such as child care, unreimbursed medical

expenses, and other appropriate family expenses as determined by the

HA.

The final rule does not dictate any specific formula or procedure for

determining that the family will have enough money left over for non-

rent expenses. The HA has discretion to develop an appropriate

procedure.

Under the proposed and final rule, the requirement to determine

that the family share of rent does not absorb an unreasonable share of

family income only applies at initial HA approval of an over-FMR

tenancy. The HA does not repeat this determination during the course of

the assisted tenancy. By contrast, the rent reasonableness requirement

(to determine that rent paid to owner does not exceed comparable market

rents) applies both at initial lease approval and during the course of

the assisted tenancy.

In the proposed rule, the requirement to assure that the family

rent burden is reasonable would have been applied to the voucher

program, as well as to an over-FMR tenancy in the certificate program.

Under the final rule, the requirement is only applied to approval of an

over-FMR tenancy, as required by law.

E. Over-FMR Tenancy: Amount of Subsidy

1. Comments

In a voucher or over-FMR tenancy, the ``payment standard'' is the

maximum subsidy for a family. In an over-FMR tenancy, the payment

standard is the FMR limit (``FMR/exception rent limit''). In a voucher

tenancy, the HA sets the payment standard. Generally, the voucher

payment standard must be in the band from 80 percent to 100 percent of

the FMR limit.

Comments note that the voucher payment standard may be less than

the FMR limit. Consequently the maximum subsidy in the voucher program

may be less than the maximum subsidy for an over-FMR tenancy. Comments

state that the same payment standard should be used for an over-FMR

tenancy and a voucher tenancy. An HA should not allow over-FMR

tenancies in its certificate program unless the voucher payment

standard equals the FMR. Otherwise over-FMR tenancy families will get a

bigger subsidy in the same kind of program.

In the regular certificate program, owner rents are adjusted

annually by applying the annual adjustment factor (AAF) that is

published by HUD. In the proposed rule, HUD proposed to adjust the

subsidized rent for an over-FMR tenancy in the same way, by applying

the published AAF. However, comments state that the proposed

calculation of adjustment for an over-FMR tenancy is too complicated.

Comments ask HUD to streamline the method of calculating subsidy

adjustments.

2. HUD Response

For an over-FMR tenancy, the new rule provides that the payment

standard is always set at the FMR/exception rent limit during the lease

term (Sec. 982.505(c)(1)). For an over-FMR tenancy, unlike a voucher

tenancy, the HA may not set a payment standard below the FMR/exception

rent limit.

In a regular certificate tenancy, the FMR/exception rent limit only

restricts rent at the beginning of the lease term. In such a tenancy,

the FMR does not limit or affect subsequent adjustments of the rent to

owner (by application of the published annual adjustment factor at the

annual anniversary). Under the proposed rule for an over-FMR tenancy,

the FMR/exception rent limit would have been applied in the same

fashion--solely as a limit on subsidized rent at the beginning of the

lease term. The FMR/exception rent limit would not have affected later

adjustments by application of the AAF during the term of the lease.

Under the final rule, the FMR/exception rent limit determines the

amount of the payment standard for an over-FMR tenancy, both at initial

leasing and over the course of the assisted tenancy. HUD believes that

this is a simpler and more readily understandable way to adjust the

amount of assistance. For an over-FMR tenancy, the amount of subsidy is

always set at the program limit. As in the voucher program, the maximum

subsidy is treated as a ``payment standard,'' and the same rules apply

to determination of payment standards for a voucher or over-FMR subsidy

(Sec. 982.505(d)). In this way, the rule gives parallel treatment of

subsidies for over-FMR and voucher tenancies. In both forms of tenancy,

a family may choose a unit renting for more than the maximum subsidy,

and the family's share of rent is not fixed.

3. How Subsidy Is Adjusted

Under the Section 8 statute, HUD has discretion to determine a

system for adjusting the subsidized rent over the life of an assistance

contract. The system for adjustment of rents may provide for annual

adjustments:

* * * to reflect changes in the fair market rentals established

in the housing area * * * or, if the Secretary [of HUD] determines,

on the basis of a reasonable formula. (42 U.S.C. 1437f(c)(2)(A))

In a regular certificate tenancy, the rent to owner (formerly

called ``contract

[[Page 23838]]

rent'') is adjusted each year of the lease. Under the HUD-determined

``reasonable formula,'' the old rent to owner (contract rent) is

multiplied by a HUD-published factor. (See 24 CFR, part 888, subpart

B.) The adjusted rent may not exceed the reasonable rent for a

comparable unassisted unit (42 U.S.C. 1437f(c)(2)(C)).

In this rulemaking, HUD proposed to adjust the subsidized rent

(maximum subsidy) for an over-FMR tenancy in the same fashion as for a

regular tenancy--by applying the published annual adjustment factor

(AAF) to the subsidized rent for the prior year. As for a regular

tenancy, the adjusted subsidized rent for an over-FMR tenancy would not

exceed the reasonable rent. Thus under this proposed system, the amount

of the rental subsidy would be identical for a regular tenancy and for

an over-FMR tenancy, both at initial leasing and over the course of the

tenancy. However, in the case of an over-FMR tenancy, the family may

pay the amount by which the actual rent to the owner exceeds the FMR/

exception rent limit (42 U.S.C. 1437f(c)(3)(B)).

In the final rule, HUD has adopted a different formula to adjust

the subsidy for an over-FMR tenancy in the Section 8 certificate

program (Sec. 982.505(c)(2)). For an over-FMR tenancy, the housing

assistance payment equals the lesser of:

(1) The applicable over-FMR payment standard (i.e., the FMR/

exception rent limit) minus the total tenant payment (the statutory

formula rent), or

(2) The monthly gross rent (rent to owner plus utility allowance

for any tenant-paid utilities) minus any minimum rent required by law.

This new HUD adjustment formula meets both of the alternate

statutory standards for adjustment of Section 8 subsidized rents (42

U.S.C. 1437f(c)(2)(A)). Subsidy is adjusted in accordance with a HUD-

determined ``reasonable formula.'' Under the formula, changes in the

over-FMR payment standard are based on ``changes in the fair market

rentals'' for the area.

F. Over-FMR Tenancy: Other Comments

1. HA Discretion

The proposed rule would have provided that an HA is not required to

approve an over-FMR tenancy. Comments argue that an HA may not refuse

if a family asks the HA to approve an over-FMR tenancy that satisfies

statutory conditions (rent is reasonable, rent payments are reasonable

for the family, and the number of such tenancies does not exceed 10

percent limit of the HA's incremental units).

In HUD's view, the choice to approve an over-FMR tenancy in the HA

program generally, or in a particular case, rests with the HA. The

language of the law explicitly allows the HA to ``approve'' family

requests that meet the statutory conditions, and therefore vests in the

HA the discretion whether or not to approve such requests in any or all

cases (42 U.S.C. 1437f(c)(3)(B)). The law provides that the family

``may pay'' a higher rental contribution if the HA has granted approval

of an over-FMR tenancy. In this way, the statute merely grants

permission for the HA to approve an over-FMR tenancy in which the

assisted family will ``pay a higher percentage of income'' than

specified in the statutory Section 8 rental formula.

The final rule (Sec. 982.506(a)(1)) provides that the HA ``may

approve'' an over-FMR tenancy at the request of a family. Generally,

the HA is not required to approve any over-FMR tenancy

(Sec. 982.506(a)(2)). However, the HA must approve an over-FMR tenancy

in accordance with program requirements if needed as a reasonable

accommodation for a person with disabilities.

2. Administrative Fee

Comments state that HUD should consider the HA's burden of

administering over-FMR tenancies in setting the administrative fee.

This rule does not establish procedures for determining the HA

administrative fee. Currently, administrative fees are calculated in

accordance with permanent requirements enacted in the fiscal year 1997

HUD appropriation act (section 202, Pub.L. 104-204, 110 Stat. 2893-

2894). (See also 62 FR 9488, March 3, 1997.)

Comments state that HAs need to educate families and the public

about the over-FMR tenancy. Otherwise people will believe that the

program is illegal. HUD agrees that HAs should provide information on

over-FMR tenancies and other aspects of the program.

VII. Voucher Tenancy: Payment Standard

A. Voucher Payment Standard

1. Setting Payment Standard

In a voucher tenancy, as in a certificate over-FMR tenancy, the

maximum monthly subsidy is based on the HA's ``payment standard''

(Sec. 982.505). In both cases, the assistance payment generally equals

the difference between the payment standard and 30 percent of adjusted

income.

In the voucher program, the HA establishes the amount of the

payment standard. Under the old rule, the HA was required to set a

payment standard within the band from 80 percent to 100 percent of

either: (1) the published fair market rent (for each FMR area and unit

size) or (2) the ``community-wide'' exception rent (i.e., a HUD-

approved exception rent for the whole HA jurisdiction).

The proposed rule would have removed the 80 percent minimum. The

proposed rule would have permitted the HA to establish a payment

standard at any level below the FMR/exception rent limit (including

HUD-approved exception rents) in effect when the payment standard is

adopted. The final rule provides that an HA must ask HUD approval to

establish a payment standard below 80 percent of the FMR limit

(Sec. 982.505(b)(1)(ii)).

2. Minimum and Maximum Payment Standard: Comments

Some comments state that an HA should have discretion, as provided

in HUD's proposed rule, to set the HA's voucher payment standard at any

level below the FMR. HUD should not set a minimum payment standard.

However, other comments argue that HUD should require a minimum

payment standard. The HA should not be allowed to set its voucher

payment standard below 80 percent of the FMR. According to the

comments, removing a federal minimum reduces subsidy, and harms

families with the lowest income. If rent exceeds the FMR, the family

pays more than 30 percent of income for rent. Reducing subsidy below

the FMR increases the gap between the HA payment standard and the

actual rent. The lowest income poor may not be able to cover the gap

and obtain decent housing.

Comments state that if an HA lowers its voucher payment standard,

an assisted family will not be able to afford the rent in spite of the

housing subsidy. A low payment standard limits housing choices of

assisted families. Elimination of a minimum voucher payment standard

deprives participant families of the opportunity to rent decent, safe

and affordable housing.

Comments also note that if HUD removes the Federally required

minimum payment standard, HAs may try to stretch voucher dollars too

far. Rent burdens could rise closer to 50 percent of family income,

than to 30 percent of income.

Comments state that HUD should either set the minimum percent of

FMR

[[Page 23839]]

that can be used as the voucher payment standard, or prohibit an HA

setting the payment standard at a level that makes housing unaffordable

to the poorest families. HUD should not allow a payment standard below

the amount needed to afford decent housing in a local market.

Comments argue that the HA should be required to set the voucher

payment standard at the FMR. A lower voucher payment standard has a

segregative effect. The voucher program should use the same payment

standard as for an over-FMR tenancy in the certificate program. For

both types of tenancy, the same standard should determine the point at

which a family pays more than 30 percent of income as the family share

of rent.

Comments state that setting the voucher payment standard to conform

with the FMR would permit more efficient and consistent program

administration.

Comments state that HUD should clarify if an HA may automatically

adjust payment standards when FMRs increase or decrease, or must

perform a ``convoluted analysis.'' The HA should be allowed to set its

payment standard up to the current FMR without the need to obtain HUD

approval or to submit rent studies or documentation. Increases in the

FMR have already been studied and approved by HUD.

3. Minimum and Maximum Payment Standard: HUD Response

After consideration of public comments, HUD has decided to retain

the restriction, absent special HUD approval, against setting the

voucher payment standard below 80 percent of the FMR/exception rent

limit. An HA's voucher payment standards must be ``based on'' the fair

market rent (42 U.S.C. 1437f(o)(1)), which represents HUD estimate of

the amount needed to rent decent housing in the local market. The level

of the voucher payment standard may not be wholly disconnected from the

fair market rent limit.

Under current procedures, FMRs are set at the ``40th percentile

rent'' (Sec. 888.113). Forty percent of units in the local market rent

below the FMR. By setting a payment standard below the FMR, an HA

reduces the percentage of units that can be rented below the payment

standard. At a given rent, a reduction of the payment standard reduces

the assistance payment, and therefore increases the share of rent that

must be paid by an assisted family. A reduction of the payment standard

therefore either limits family choice of rental housing in the local

market, or increases family rent burden.

To assure that the voucher standard is ``based on'' the FMR, and

does not unduly limit family housing choice, HUD has decided to retain

the 80 percent minimum. The HA may, however, request approval of a

payment standard below this amount. HUD may then consider whether the

proposed payment standard level allows a reasonable housing choice in

the local market, and bears a reasonable relation to the published FMR.

B. Shopping Incentive

1. Comments

In the regular certificate program, a participant family does not

have an economic incentive to shop for a lower rent unit. The subsidy

covers the actual rent paid to the owner (up to the FMR), and any

reduction in rent reduces the amount of the subsidy. In the voucher

program, however, the payment standard, not the actual unit rent,

determines the amount of subsidy (except in cases when the so-called

minimum rent limits the amount of subsidy). A lower rent to the owner

generally does not reduce the amount of the subsidy. In the voucher

program, the family has an incentive to shop for a cheaper unit.

Comments express different views on the value of a shopping

incentive in the tenant-based programs. Some comments approve use of a

shopping incentive, and recommend a shopping incentive for both the

certificate and voucher programs. A participant should be rewarded for

renting a less expensive unit. Other comments criticize the voucher

shopping incentive, and assert shopping incentive should be eliminated

or restricted. Comments suggest that shopping incentive should be

treated the same way in the certificate and voucher programs. HUD

should include or exclude shopping incentive in both programs.

Comments claim that the shopping incentive does not work. Comments

state that voucher families do not shop for lower rents. Voucher

families seek higher-priced housing in safer neighborhoods with better

schools. The shopping incentive is paid largely to in-place families

who do not shop for new apartments. The shopping incentive is

inequitable, costly, and wastes subsidy resources. The voucher shopping

incentive should be either eliminated or granted only to families that

actually move to housing renting below the payment standard.

Under the voucher formula, the maximum assistance payment for a

family is determined by an HA-established payment standard, rather than

actual rent of the assisted unit (42 U.S.C. 1437f(o) (1) and (3)). For

this reason, a lower rent generally does not reduce the amount of

subsidy. (In some cases, a family that rents a unit substantially below

the payment standard must pay a minimum share of the rent.)

Comments note that in the certificate program, subsidy is limited

according to the size of unit actually rented by family. Comments

recommend that this principle should also apply in the voucher program.

A comment acknowledges that a form of voucher shopping incentive is

required by federal law. The comment proposes, however, that HUD delete

the regulatory shopping incentive not required by the law. Under the

old voucher rule, the amount of subsidy is based on size of the

assisted family, not the size of the unit actually rented by the

family. The comment contends that the old regulatory system in the

voucher program is wasteful and inequitable. In the certificate

program, a family pays the same contribution even if it rents a smaller

unit. The landlord only receives rent for the size of unit actually

rented by family. In the voucher program also, a family should receive

subsidy for the unit size actually rented by the family.

2. HUD Response

Since the beginning of the certificate program, the Section 8

subsidy has been based on rent for the unit finally selected by a

family, even if the family could have elected to rent a bigger unit

within the appropriate FMR for the family size. The certificate

assistance covered the actual rent for the unit selected, within the

FMR for the actual size of the unit selected. In the second phase of

the conforming rule, published on July 3, 1995, this principle was

extended to the voucher program. In describing principles governing use

of the HA ``subsidy standards'' (HA policies governing the appropriate

subsidy for the family size and composition), the 1995 rule provides

that the voucher payment standard may not exceed the payment standard

for the unit rented by the family (Sec. 982.402(c)(2)).

This final stage of the conforming rule states the formulas for

determining the amount of assistance in a regular certificate tenancy,

and for a voucher, or an over-FMR tenancy. For all three types of

assistance, the subsidy may not exceed the maximum subsidy ``for the

unit size rented by the family'' (Sec. 982.508(a)(2)(ii) (regular

tenancy);

[[Page 23840]]

(Sec. 982.505(d)(2)(ii)) (voucher or over-FMR tenancy).

In the final rule, a common provision describes how to determine

the payment standard for either a voucher tenancy or an over-FMR

tenancy (Sec. 982.505(d)(2)). The payment standard for a family is the

lower of:

--the payment standard for the family unit size, or

--the payment standard for the unit size rented by the family.

VIII. Family Size: Effect on Amount of Subsidy

A. General

An HA adopts standards (``subsidy standards'') to determine the

number of bedrooms for a family. ``Family unit size'' is the

appropriate number of bedrooms for a family under the HA subsidy

standards. The family unit size is used to determine the maximum rent

subsidy for a family.

The HUD rule describes how family unit size determines the maximum

rent subsidy for a family in the certificate or voucher program

(Sec. 982.402(c); definitions of ``family unit size'' and ``subsidy

standards'' in Sec. 982.4). (These rules were contained in the second

phase of this conforming rule, published 60 FR 34660, July 3, 1995).

Under these existing rules, the subsidy for a family in the certificate

or voucher program is the lower of the appropriate subsidy (1) for the

size and composition of a particular family (family unit size); or (2)

for the particular unit size rented by the family (Sec. 982.402(c)).

The same principle is applied and clarified in this rule, and is

extended to calculation of subsidy for an over-FMR tenancy.

In calculating a family's subsidy for a voucher tenancy or over-FMR

tenancy, the payment standard is the lower of: the payment standard for

the family unit size, or the payment standard for the unit size rented

by the family (Sec. 982.505(d)(2)). This rule applies to each

determination and redetermination of the applicable payment standard

during the course of a voucher or over-FMR tenancy.

In a regular tenancy under the certificate program, the FMR/

exception rent limit is the lower of the FMR/exception rent limit for

the family unit size, or the FMR/exception rent limit for the unit size

rented by the family (Sec. 982.508(a)(2)). For a regular tenancy, the

FMR/exception rent limit is the maximum gross rent (and therefore the

maximum rent to owner) at the beginning of the lease term. The initial

rent to owner is the base for subsequent rent adjustment at each annual

anniversary. The FMR/exception rent limit does not otherwise affect

rent adjustments during the course of a regular tenancy.

B. Space for Live-in Aide

With HA approval, a live-in aide may reside in the unit to provide

necessary supportive services for a member of the assisted family who

is a person with disabilities (see Sec. 982.316). In previously

published provisions, the conforming rule provides that a live-in aide

must be counted in determining the family unit size under the HA

subsidy standards (Sec. 982.402(b)(6)). Thus the maximum subsidy

increases so that the family can rent a unit with additional space for

the live-in aide. In this phase of the conforming rule, the rule

specifies that this general principle also applies when a person with

disabilities chooses to reside in certain special housing types:

congregate housing (Sec. 982.608(b)); a group home

(Sec. 982.613(c)(1)(ii)); shared housing (Sec. 982.617(c)(3)); or a

cooperative (Sec. 982.619(d)(2)).

IX. Over-FMR or Voucher Tenancy--Payment Standard: Changes in

Subsidy During Tenancy

A. How Assistance is Adjusted

In a regular certificate tenancy, rent to owner is adjusted at each

annual anniversary during the lease term (Sec. 982.509). Under the

proposed rule, HUD would have used the same system to adjust HUD

subsidy for an over-FMR tenancy. On each contract anniversary, the

amount of subsidy would have been adjusted by applying the most recent

adjustment factor published by HUD.

Under the final rule, the amount of the monthly assistance payment

for an over-FMR tenancy is adjusted by the same system used for a

voucher tenancy.

For a voucher or over-FMR tenancy, the amount of the monthly

subsidy (assistance payment) for a participant family is the amount by

which the HA ``payment standard'' exceeds the family contribution (as

determined by statute and rule for each program). The payment standard

is the lower of the appropriate payment standard for the family size or

for the unit size actually rented by the family (Sec. 982.505(d)(2);

Sec. 982.402(c)(2)).

The final rule provides (Sec. 982.505(d)(4)) that the payment

standard used to compute the subsidy during the lease term is the

higher of: (1) the current payment standard, or (2) the initial payment

standard minus any drop in rent to owner. The current payment standard

is the payment standard amount determined at the most recent regular HA

reexamination. The initial payment standard is the payment standard

determined when the HA approves the lease (before the beginning of the

lease term). If rent to owner drops during the term, the rent decrease

is subtracted from the initial payment standard. Thus this amount

equals the initial payment standard minus any amount by which the

initial rent to owner exceeds the current rent to owner.

B. Protecting Family Against Drop in Subsidy

Under existing requirements for the voucher program, a participant

family is protected against a drop in the monthly subsidy during the

lease. The payment standard may rise (for example, if there is an

increase in the published FMR). However, if family composition does not

change, the payment standard may not fall below the HA payment standard

at the beginning of the lease term. When deciding whether to lease a

unit at the rent demanded by an owner, a family can count on receiving

a subsidy calculated from the same (or higher) payment standard during

the term of the lease, though the subsidy may decrease if there is a

change in family composition or the family decides to move to another

unit.

In an over-FMR tenancy, the payment standard for each unit size is

the FMR/exception rent limit. In the voucher program, the HA may set

its payment standard for each unit size at 80 to 100 percent of the

FMR/exception rent limit. For a voucher or over-FMR tenancy, the

payment standard for the family is the higher of (1) the payment

standard at the beginning of the lease term (minus the amount of any

actual drop in the rent to owner during the course of the tenancy) or

(2) the payment standard determined at the most recent regular

reexamination (Sec. 982.505(d)(4)).

In an over-FMR or voucher tenancy, the family must pay out-of-

pocket any rent in excess of the payment standard. In deciding whether

to lease at a given rent, the family needs assurance that the HA

assistance payment will not fall during the term of the tenant's lease

because of reductions in the payment standard. Under this rule, the

family is protected against a drop in the payment standard during the

lease term. The payment standard that is used to calculate the family's

assistance does not drop below the HA payment standard in effect at the

time the lease is approved.

During the tenancy, a family is largely insulated against a

decrease in voucher or over-FMR subsidy because of a decrease in the

applicable HA payment standard. In the final rule, this

[[Page 23841]]

protection is modified by reducing the subsidy to the extent of any

actual decrease in the rent to owner since the beginning of the

tenancy.

Most often, rent to owner decreases if there is a general fall in

market rents, and if rent to owner is reduced by enforcement of market

comparability at the annual anniversary. This rule provides that the HA

must redetermine comparability if there has been a five percent

decrease in the FMR in effect 60 days before the contract anniversary

as compared with the FMR in effect at the prior contract anniversary.

Rent to owner may also decrease in accordance with the terms of the

lease, or because rent is reduced by local rent control or some other

binding requirement. Regardless of the cause of any reduction in the

rent to owner, the actual amount of the rent reduction is deducted from

the amount of the initial payment standard in calculating the current

payment standard.

The family is protected against a fall of the payment standard

during the term of the lease. On the other hand, however, the payment

standard for the family rises if the HA payment standard at the time of

regular reexamination is higher than the HA payment standard at the

beginning of the lease/contract term. If the family enters a new

assisted lease (for the same or a different unit), the payment standard

for the family is then conformed to the current HA payment standard in

effect when the new lease is approved. The family is only protected

against a fall in the HA payment standard during the HAP contract term.

C. When Payment Standard Changes

Comments state that an HA should only change the payment standard

at the annual recertification. The HA should not change the payment

standard as soon as there is a change in the family size.

Under the payment standard formula in the final rule, the payment

standard is adjusted if there is a change in the payment as determined

at the most recent ``regular'' reexamination, the annual

recertification of family income and composition.

X. Regular Tenancy--Rent to Owner: Annual Rent Adjustment During

Tenancy

A. Comments

Some comments approve allowing downward adjustment of certificate

program contract rents--now called ``rent to owner.'' An HA should

adjust rent as market conditions change.

Other comments object to decrease of contract rent by annual

adjustment. Generally, a conventional landlord does not lower rent on

an ongoing lease. Conventional rents increase or remain steady. The

comments claim that negative rent adjustments are a disincentive to

owner participation. The owner runs a risk of rent reduction. If area

rents are falling, Section 8 rent to owner should not increase by

application of the AAF. However, rents should not be reduced. Rent

reasonableness should be used to control excess rents, rather than

adjustment by a negative AAF.

The new rule deletes the old provision that prohibited annual

adjustment below the initial rent (at the beginning of the lease term).

Comments state that this change will discourage owner participation.

The rule should not permit adjustment below the initial rent.

Comments recommend that so long as rent is reasonable, rent should

be adjusted up to the FMR exception rent limit at time of adjustment.

The increase in the FMR is greater than the AAF. Because of the AAF

system, an HA cannot approve adjusted rent that is reasonable and

within the FMR.

The rule provides that an owner must request an annual adjustment

at least sixty days in advance (Sec. 982.509(b)(5)). Adjustments are

not retroactive. The annual adjustment for a contract anniversary must

be requested at least sixty days before the next anniversary

(Sec. 982.509(b)(6)).

Comments ask HUD to clarify requirements concerning an owner

request for adjustment. An HA points out that the requirement to submit

a written request for rent adjustment is burdensome, and creates

paperwork for administration of the program. The HA prefers to contact

owners personally or by telephone. Other comments state that the rule

should require an HA to give an owner advance notice of an available

increase in rent, and that the increase must be requested in writing.

Rules that deny owner rent increases because of their lack of

sophistication contribute to growing owner hostility. Because of such

hostility, families experience greater difficulty locating housing.

Comment suggests that an owner should be permitted to terminate the

tenancy if dissatisfied with the adjustment.

Some comments assert that annual adjustments should only be granted

when the owner requests. HUD should require written notice of rent

increases (both in the certificate and voucher programs). This

requirement would reduce confusion for landlords with tenants in both

programs. Requiring an owner to give notice of a rent increase may

delay or reduce rent increase requests. Another HA currently requires

the owner and tenant to submit request for lease approval 60 days

before the anniversary date. By this process, an HA can determine if a

proposed rent increase is consistent with the annual adjustment factor

and rent reasonableness.

Comments state that an adjustment should be effective a month after

the HA receives the owner's written request. The owner should not

receive a retroactive adjustment. Other comment says that owners will

object if adjustment is not retroactive when the owner request is late.

The current regulation causes incredible paperwork processing rent

increases.

Comments recommend that the rule should state whether HA is allowed

to supply forms for requesting adjustment.

B. New Rule

In a regular certificate tenancy, rent to owner is adjusted each

year. The new rule provides (Sec. 982.509(b)) that the adjusted rent is

the lower of:

--The pre-adjustment rent (minus any previously approved special

adjustments) multiplied by the annual adjustment factor (AAF) published

by HUD, or

--The reasonable rent.

Rent to owner may be increased or decreased by applying the two

elements of the regulatory adjustment formula (Sec. 982.509(b)(3)).

An AAF may be positive or negative. The published AAF for the area

is based on objective data concerning changes in residential rental

costs for the area (see 60 FR 12594, March 7, 1995). In addition, the

adjusted rent may not exceed the reasonable rent for comparable units

rented on the private unassisted market.

HUD has not adopted recommendations to hold owner harmless against

a rent decrease either because of a negative published factor (however

rare), or because the market rent is less than rent adjusted by the

formula factor. The regulatory adjustment formula for a regular

certificate tenancy is a reasonable basis for determining changes in

rent to owner during the assisted lease, and thereby determining the

appropriate amount of Federal subsidy.

For a regular tenancy, the family does not negotiate the procedure

for adjusting rent received by the owner. Changes in rent are not

controlled by normal constraints of the private unassisted market. The

family's share of the rent is determined by the amount of family

income, and is not affected at all by the amount of the adjusted rent

to owner.

[[Page 23842]]

The family therefore lacks any incentive to limit the rent paid to the

owner from HA assistance payments.

For this reason, the program must supply another formula to

determine rent adjustments during the assisted tenancy. The adjustment

formula in this rule substantially restates the formula successfully

used since the beginning of the Section 8 certificate program (with

some technical modifications). Section 8 rents must provide an adequate

incentive for participation by private owners at competitive private

market rents. In general, massive participation by private landlords

shows that existing certificate rent mechanisms, including procedures

for adjustment of owner rent, have largely afforded adequate

compensation for private landlords. In addition, HUD believes that the

procedures for determining initial rent and rent adjustments reflect a

reasonable balance between rents that open housing opportunities for

program participants, and limitations to maximize the number of

families assisted with available funds.

In the final rule, HUD has revised proposed language that states

when an owner must request an annual adjustment. The proposed rule

would have provided that the rent will only be increased prospectively,

and that an increase for any anniversary date must be requested by the

next anniversary. These provisions are modified to allow at least sixty

days for HA action on the owner request.

The owner must give the HA written notice requesting an increase in

the rent (Sec. 982.509(b)(4)). The rent is not increased unless the

owner has complied with the HAP contract. To receive a rent increase,

the request must be submitted at least sixty days before the increase

is effective, and at least sixty days before the next annual

anniversary (Sec. 982.509(b)(5) and (6)).

XI. Regular Tenancy--Rent to Owner: Special Rent Adjustment During

Tenancy

A. General

In a regular certificate tenancy, rents are adjusted annually by a

published factor. If formula adjustments are not sufficient, HUD may

approve additional increases in the rent to owner. Such increases are

called ``special adjustments.'' By law (42 U.S.C. 1437f(c)(2)(B)), HUD

has discretion to approve special adjustments:

* * * necessary to reflect increases in the actual and necessary

expenses of owning and maintaining the units which have resulted

from substantial general increases in real property taxes, utility

rates, or similar costs which are not adequately compensated for by

[formula adjustments] * * *.

In accordance with the law, the rule provides that special

adjustments may only be granted because of ``substantial and general

increases'' of unit costs (Sec. 982.510(a)(1)). Comments approve these

requirements. By law, special adjustments are subject to comparability.

Adjusted rent, including any special adjustment, may not exceed

reasonable rent for comparable unassisted units (42 U.S.C.

1437f(c)(2)(C); Sec. 982.510(b)).

An owner does not have any right to receive a special adjustment of

the rent to owner (previously called ``contract'' rent). A special

adjustment must be approved by HUD (Sec. 982.510(a)(2)). HUD has ``sole

discretion'' whether to approve or withhold a special adjustment

requested by an owner (Sec. 982.510(a)(1)).

B. Purpose

The old rule allowed special adjustments only for the following

specific cost categories: real property taxes and assessments, and

regulated or non-regulated utility costs. The proposed rule would have

enlarged the list of covered cost categories, by permitting HUD

approval of special adjustments for ``security costs'' as well as a

broad authorization for approval of costs ``similar'' to the enumerated

cost categories. The proposed rule would also have provided that HUD

must approve a special adjustment to cover increases in ownership and

maintenance cost that results from expiration of a real property tax

exemption.

The final rule does not expand the purpose of special adjustments

allowed under the old rule. In this respect, the new rule substantially

restates the grounds for special adjustment in the old rule. The final

rule permits special adjustments to cover increases in utility costs or

in real property taxes and special governmental assessments

(Sec. 982.510(a)(1) and Sec. 983.255(b)). The final rule does not

include authority to approve special adjustments for ``security costs''

or ``similar costs.'' Special adjustments may only be approved by HUD

for the specific purposes enumerated in the rule.

At this time, HUD knows no persuasive justification for expansion

of special adjustments. First, any increase in special adjustments

would draw on limited program funds in a time of severe budgetary

restrictions. Second, HUD knows of no persuasive showing or evidence

that a loosening of policy on special adjustments is necessary to

provide adequate housing choice for assisted families. Third, while

owners will always seek maximum rents, it is hard for HAs to determine

when special adjustments are really necessary in a particular case, and

for HUD to evaluate relative need for special adjustments in particular

cases. Fourth, special adjustments significantly complicate HA

administration and control of program rents. HUD believes that HAs

should primarily rely on formula adjustments by published factors, as a

universal process for adjusting program rents.

The law provides that HUD may approve rent adjustments HUD

determines necessary to cover increases in ownership and maintenance

expenses ``. . . that have resulted from the expiration of a real

property tax exemption'' (42 U.S.C. 1437f(c)(2)(B)). Such adjustments

may only be approved if appropriations are available.

The proposed rule would have provided that HUD must approve a

special adjustment to cover increased expenses when a real property tax

exemption expires. Although some comments endorse this provision, the

final rule does not require or authorize special adjustments at

expiration of a real property tax exemption. At this time, appropriated

funds are not available for this purpose. The final rule therefore

removes a proposed provision reciting the authority to grant a special

adjustment for this purpose.

Comments state that the rule should allow special adjustments for

security costs, and for increases in insurance cost because of crime.

The final rule does not authorize HUD approval of special adjustments

for ``security costs.'' HUD believes that such costs should be met from

market rents in accordance with program requirements. In the

certificate and voucher programs, HAs do not review owner budgets. It

would be difficult to determine if proposed increases are really

required, or if crime-related costs can be met from assisted rental

revenues. If increases were granted for security costs, there is no

existing mechanism to assure that the owner would actually use the

additional money for this purpose. For efficient administration of the

tenant-based programs, the HA should not attempt to micro-manage owner

expenditures for particular costs.

Comments state that HUD should allow special adjustments because of

major property upgrades that benefit the tenant. This recommendation is

not adopted. This proposal would evade the fair market rent (for the

family size and for the size of the unit rented) as the central

statutory and regulatory control on unit rent. Moreover, the law does

not

[[Page 23843]]

permit special adjustments for improvement of the particular project.

As noted above, special adjustments may only be granted because of

``general increases'' in real property costs--i.e., common increases

that broadly affect landlord operating costs in the market area.

HA comments state that the special adjustment rules are confusing.

HUD should give a better description of the cases when special

adjustments are warranted. HUD believes that the final rule contains a

clear and straight-forward list of the types of expenses for which HUD

may approve a special adjustment of the rent paid to owner.

Comments recommend eliminating special adjustments, and

substituting adjustment to level of the current FMR. In the current

system, HAs negotiate new HAP contracts to avoid the need for HUD

approval of special adjustments. HUD has not adopted this

recommendation.

C. Comparability

In accordance with the law, the rule provides that adjusted rent

must be reasonable in comparison with rent of unassisted units in the

local market. This principle applies to both the tenant-based and the

project-based certificate programs. The reasonableness limit applies to

special adjustments, as well as regular annual adjustments of the rent.

HUD may not approve a special adjustment if the adjusted rent to

owner would exceed the reasonable rent for comparable unassisted units

(Sec. 982.510(b) and Sec. 983.255(c)(2)). (For PBC, reasonable rent is

determined by a comparability study in accordance with special PBC

requirements.) HUD may not consider granting a special adjustment over

the amount of rent as adjusted by applying the published formula factor

(AAF), unless reasonable rent exceeds the factor adjusted rent.

Application of comparability for special adjustments satisfies two

statutory requirements. First, the law provides that regular and

special adjustments may not result in material difference between rents

charged ``* * * for assisted units and unassisted units of similar

quality, type and age in the same market area. * * *'' (42 U.S.C.

1437f(c)(2)(C)). Second, the law also provides that special adjustments

may only be granted for costs ``not adequately compensated'' by regular

annual formula adjustments (42 U.S.C. 1437f(c)(2)(B)).

In the project-based and tenant-based certificate programs, market

rent for comparable unassisted units is used as a regulatory standard

for determining whether owner is ``adequately compensated'' by the unit

rent. Under the law, special adjustments are not designed to meet

special or unique needs of a particular landlord. Special adjustments

may only be approved to cover ``substantial general increases'' in

costs common to owners in the locality, such as a general increase in

real property tax rates (42 U.S.C. 1437f(c)(2)(B)). Thus levels of

comparable unassisted market rents are used to gauge rents generally

needed to adequately compensate landlords for increased costs to

maintain and operate rental housing in the market area.

D. Required Documentation

The old rule provides that an owner who seeks a special adjustment

must submit ``financial statements'' which ``clearly support'' the

owner's request for a special adjustment. This requirement applied both

to the tenant-based and project-based certificate programs. In this

rulemaking, HUD proposed to continue this requirement for both

programs.

In the final rule, the financial statement requirement is retained

only for PBC (Sec. 983.255(d)), but is not included in the special

adjustment requirements for a regular tenancy in the tenant-based

certificate program (Sec. 982.510). The final PBC rule

(Sec. 983.255(c)(1)) provides that an owner must demonstrate that rent

to owner ``is not sufficient for proper operation of the housing''. The

PBC rule (Sec. 983.255(d)) also states that:

The owner must submit financial information, as requested by the

HA, that support the grant or continuance of a special adjustment.

For HAP contracts of more than twenty units, such financial

information must be audited.

In the tenant-based certificate program, the grant or denial of a

special adjustment only affects rent during the present lease term of a

particular assisted family. Conversely the special adjustment will not

affect rent under a new lease for the same family or for any other

family. In PBC, the grant or denial of a special adjustment may affect

the level of rents during the remaining term of the project-based HAP

contract, and may apply to all units covered by the project-based HAP

contract.

For the tenant-based program, the owner will not be required to

submit a ``financial statement'' showing that costs are not adequately

compensated by regular annual adjustments. To receive a special

adjustment, the owner must show that a requested adjustment meets the

regulatory standard--that the adjustment is appropriate to cover

increases in actual and necessary costs for eligible cost items.

However, the rule does not specify any particular format or procedure

for documenting this fact.

For PBC, however, the rule provides owner must ``demonstrate'' that

cost increases are not adequately compensated for by the annual factor

adjustment (Sec. 983.255(c)(1)). The PBC owner must submit ``financial

information'' that support grant or continuance of a special adjustment

(Sec. 983.255(d)). For PBC HAP contracts covering more than 20 units,

the financial information must be audited.

E. HUD Approval

Comments state that HUD should allow an HA to approve special

adjustments without HUD approval. HAs are qualified to approve special

adjustments.

Under the law, HUD may not adopt this recommendation. HUD itself

must approve all special adjustments. The HAP contract must provide

``for the Secretary to make'' special adjustments. The Secretary may

make special adjustments to the extent ``* * * [the Secretary]

determines such adjustments are necessary. * * *'' (42 U.S.C.

1437f(c)(2)(B)). By these provisions, HUD has statutory authority to

determine that a special adjustment is necessary, and the authority to

make a special adjustment in accordance with the Secretary's

determination. This authority is clearly assigned to HUD, and may not

be delegated to the HA.

Comments state that an HA should have opportunity to comment before

HUD decides to grant or deny a special adjustment. HUD believes there

is no need to modify the rule in this respect. Ordinarily, a special

adjustment is not granted without the HA's support. The HA submits the

owner's request for special adjustment to HUD. The HA has ample

opportunity to present its views. The HA provides supporting

documentation and justification. The HA may submit any comments or

information in support of, or in opposition to, the owner's request for

a special adjustment. There is no need or advantage to complicate the

adjustment process with additional procedural requirements.

Comments state that HUD should be required to respond in 30 days

when an HA asks HUD to approve a special adjustment. This

recommendation is not adopted. HUD will try to respond promptly to

special adjustment or other HA or owner concerns. However, HUD cannot

undertake to comply with an arbitrary deadline that may not fit the

facts of individual cases.

A special adjustment must be approved by HUD. The special

[[Page 23844]]

adjustment provisions are revised to emphasize that HUD has sole

discretion whether to grant or deny a special adjustment. The final

rule states that HUD may approve a special adjustment ``* * * at HUD's

sole discretion * * *. '' (Sec. 982.510(a)(1) and Sec. 983.255(a)(1)).

The rule also provides that the Section 8 owner ``does not have any

right to receive a special adjustment'' (Sec. 982.510(a)(2) and

Sec. 983.255(a)(2)).

F. Term

Comments state that HUD should not require an HA to track rent

increases for a one-time special adjustment. A special adjustment for

ongoing costs should not be treated as a one-time adjustment. Comments

note that it is burdensome and unnecessary to track special

adjustments, and require re-justification of approved special

adjustments. Comments assert that the cost of deducting approved

special adjustments may not exceed the saving. The deduction of special

adjustments must be calculated, tracked and explained to owners.

The final rule re-states and substantially simplifies proposed

provisions on special adjustments for temporary or one-time costs

(Sec. 982.510(c)(2) and Sec. 983.255(e)(2)). The HA may withdraw or

limit the term of a special adjustment. If HUD approves a special

adjustment to cover temporary or one-time costs (e.g., a one-time

special assessment for drainage improvements), the special adjustment

is only a temporary or one-time increase of the rent to owner.

The rule also clarifies the relation between a special adjustment,

and a subsequent regular annual adjustment by application of HUD's

published annual adjustment factor (AAF). In an annual adjustment, the

owner's pre-adjustment rent is multiplied by the AAF

(Sec. 982.509(b)(1)(i) and Sec. 983.254(b)(1)(i)). The rule now states

that the pre-adjustment rent to owner--the base for the annual

adjustment, does not include any previously approved special adjustment

(Sec. 982.509(b)(2) and Sec. 983.254(b)(3)).

XII. Fees and Charges to Family for Meals, Supportive Services or

Other Items

The final rule contains new provisions that state restrictions on

owner charges to the family. These provisions largely codify and

clarify HUD's construction of the existing program rules.

The rule (Sec. 982.513) provides that:

--Rent to owner may not include the cost of meals or supportive

services. Reasonable rent (comparable rent) does not include the value

of meals or supportive services.

--The lease may not require the tenant or family members to pay charges

for meals or supportive services. Non-payment of such charges is not

grounds for eviction.

--The owner may not charge the tenant extra amounts for items

customarily included in rent in the locality, or provided at no

additional cost to the unsubsidized tenants in the premises.

XIII. Utility Allowance

A. Objections to Utility Allowance

1. Comments

Comments state that HUD should eliminate the utility allowance in

the certificate and voucher programs. Comments claim that elimination

of utility allowances would unify the certificate and voucher programs.

Comments assert that the utility allowance promotes dependence and

reliance on federal subsidy. Because of the utility allowance, the HA

must pay a tenant without countable income to live in an assisted unit.

The utility allowance does not encourage conservation and reduce tenant

consumption.

2. HUD Response

The utility allowance is used when the family is responsible for

paying the cost of utilities or other housing services that are not

included in the rent to owner. The HA's utility allowance is the HA's

estimate of the monthly cost for reasonable utility consumption (see

definition of ``utility allowance'' at Sec. 5.603). The utility

allowance performs different roles in the certificate and voucher

programs. In the certificate program, the utility allowance is used so

that a family does not pay more than the maximum rent. In the voucher

program, the utility allowance is used so that a family does not pay

less than the minimum rent.

In the certificate program, the utility allowance is deducted from

the family's total rent (``total tenant payment'') to calculate the

amount payable to the owner (``tenant rent''). The utility allowance is

used so that all families pay the same rental contribution (``total

tenant payment''), regardless of whether utilities for a particular

unit are paid by the owner or the family. The utility allowance is

necessary for equivalent and equitable treatment of families that rent

units with or without tenant-paid utilities.

In the certificate program, the amount of ``rent'' paid by a family

is specified by law. If the utility allowance is more than the total

tenant payment, the family receives a ``utility reimbursement'' from

the HA. The utility reimbursement is paid so that the family's out of

pocket utility cost to live in the unit does not exceed rent payable

under the statutory rent formula. The HA utility reimbursement provides

money the family can use to pay for utilities not included in the rent

to owner.

The amount of the utility allowance and utility reimbursement are

not determined by the actual utility costs of a particular assisted

family. Rather, the utility allowance is based on reasonable

consumption by an ``energy conservative household of modest

circumstances'' (Sec. 5.603) in the community. A family that wastes or

over-uses utilities does not get a higher utility allowance or utility

reimbursement. The family pays for any excess consumption of tenant-

paid utilities and benefits from its own funds.

In the voucher program, the utility allowance only affects

calculation of the statutory maximum subsidy (``minimum rent''). Under

the voucher law, the family must pay a minimum share of the actual rent

for the unit ``including the amount allowed for utilities in the case

of a unit with separate utility metering'' (42 U.S.C. 1437f(o)(2)).

Thus the voucher statute explicitly requires use of a utility allowance

for separately metered utilities that are not included in rent to

owner. The utility allowance increases the base for calculation of the

minimum rent, and therefore increases the minimum rent paid by affected

voucher families.

B. Administration of Utility Allowance

1. Comments

Comments state that the utility allowance requirement forces an HA

to review utility costs annually and submit cumbersome utility

calculations for HUD approval. Comments state that the rule should

require HUD to act on the HA utility allowance submission within 30

days. Comments ask if an HA should use the new utility allowance

schedule if the HA is conducting a interim reexamination because of a

change in family income. Comments state that an HA should maintain

separate utility allowance schedules for areas with significant

difference in utility costs.

2. HUD Response

Under the rule, the HA is not required to seek HUD approval before

adopting the utility allowance schedule. The HA must give HUD a copy of

the utility allowance schedule, and--if requested by HUD--must provide

any information

[[Page 23845]]

or procedures the HA used to prepare the schedule (Sec. 982.517(a)(2)).

At HUD's direction, the HA must revise the schedule, to correct any

errors, or as necessary to update the schedule (Sec. 982.517(c)(2)).

As in the past, the HA must review its utility allowance schedule

each year (Sec. 982.517(c)(1)). Under the old rule, the HA was required

to revise the schedule if there was a ``substantial change'' in utility

rates. Some HAs have failed to keep their allowance schedules up to

date. The new rule establishes a more objective and definite standard

triggering the requirement for revision of the utility allowance

schedule. The new rule now provides that the HA must revise the

allowance for a particular utility category if there is a ten percent

or more change in the utility rate since the last revision

(Sec. 982.517(c)(1)).

An HA must maintain information that supports its annual utility

allowance review and any revisions of the utility allowance schedule

(Sec. 982.517(c)(1)).

Sometimes, there may be significant differences in utility cost

levels in different parts of an HA jurisdiction. This difference may

occur because the HA has a large operating area, such as a State with

different climatic regions, or because there are different utility

suppliers for portions of the HA jurisdiction. The rule does not seek

to specify when an HA should or must issue separate schedules for

different portions of the HA jurisdiction. In general, the HA retains

discretion to decide when it is necessary to set up separate schedules.

However, an HA's utility allowances must meet the regulatory standard--

that the allowances must be based on utility costs for households ``in

the same locality'' (Sec. 982.517(b)(1)).

At any regular or interim reexamination of family income, the HA

must determine the appropriate utility allowance from the current

utility allowance schedule (Sec. 982.517(d)(2)). At the effective date

of the reexamination, the HA must make appropriate adjustments in the

housing assistance payment, including adjustments reflecting revision

of the utility allowance. In the certificate program, changes in the

utility allowance may affect the amount of the assistance payment to

owner, the rent remaining to be paid by the family (``tenant rent''),

utility reimbursement, and maximum rent to owner for a new rental. In

the voucher program, changes in the utility allowance only affect

calculation of the minimum rent.

C. Services Included in Utility Allowance

1. Comments

The utility allowance schedule covers tenant-paid utilities and

other tenant-paid housing services. Comments state that HUD should

carefully review what is included in the utility allowance. Comments

ask what other ``services'' are covered.

Comments ask if the utility allowance must include garbage service

and sewer service, though not mentioned in the rule. Comments state

that the utility allowance should cover sewer and trash removal

expenses.

The rule allows a utility allowance for air conditioning of the

unit. Comments ask if air conditioning is mandatory. Comments ask if

the HA must grant a utility allowance for air conditioning if air

conditioning is not commonly used for residential rentals in the HA

area. Comments recommend that HUD should clarify that the utility

allowance does not include ``non-essential utility mediums'' such as

cable and satellite television.

2. HUD Response

The HUD Office of Policy Development and Research has found that

HAs throughout the United States use a wide variety of utility

allowance schedules and formats. Many schedules are internally

inconsistent, or at wide variance to the schedules of other

jurisdictions using the same utility suppliers.

HUD believes that the use of a common format will help HAs improve

the quality and consistency of HA-adopted utility allowance schedules,

so that the schedules more accurately represent utility consumption and

costs in different localities. The final rule provides that the utility

allowance schedule must be prepared and submitted on the form

prescribed by HUD (Sec. 982.517(b)(4)).

An HA's utility allowance schedule, and the utility allowance for

an individual family, must include the utilities and services that are

necessary in the locality to provide housing that complies with the

housing quality standards. However, the HA may not provide any

allowance for non-essential utility costs, such as costs of cable or

satellite television. (Sec. 982.517(b)(2)(i))

The HA utility schedule must classify covered utilities and other

services according to specified categories (Sec. 982.517(b)(2)(ii)).

The final rule refines and supplements the list of covered categories:

heating; air conditioning; cooking; water heating; water; sewer;

trash collection (disposal of waste and refuse); other electric;

refrigerator (cost of tenant-supplied refrigerator); range (cost of

tenant-supplied range); and other specified housing services.

The utility allowance must cover tenant-paid fees or costs for

trash collection and sewage.

The housing quality standards do not require air conditioning. The

final rule provides that the HA must provide a utility allowance for

tenant-paid air-conditioning costs if the majority of housing units in

the market provide centrally air-conditioned units or there is

appropriate wiring for tenant-installed air conditioners

(Sec. 982.517(b)(2)(ii)).

D. Determining Utility Allowance: Unit Size and Size of Family

1. Comments

The rule provides that a utility allowance is based on the unit

actually leased by family, not on the family unit size (appropriate

size unit for family under the HA ``subsidy standards'')

(Sec. 982.517(d)(1)). According to comments, the utility allowance

should be based on the family unit size.

Comments note that an elderly family that wants to stay in the same

unit rent may rent a unit larger than necessary (larger than the family

unit size). If the HA uses the utility allowance for the actual size

unit, the rent exceeds FMR, and the family must move.

Comments state that an HA should have the option to give a utility

allowance based either on the number of occupants or on the unit size.

Other comments state that the family should receive a utility allowance

for the larger of family unit size or actual unit leased.

Comments state that the utility allowance should be based on actual

need for the particular utility by the actual family configuration.

Comments claim that utility expenses reflect the size of family, not

the size of the unit. Comments state that using the utility allowance

for a smaller unit penalizes a family for renting a smaller unit to

reduce family rent.

2. HUD Response

The final rule provides that the HA must use the utility allowance

for the actual unit size rented. HUD has not accepted the

recommendation to use the utility allowance for the family unit size

under the HA subsidy standards, or the greater of the utility allowance

for the family unit size or actual unit size.

In occupancy of a particular unit, the family needs to pay

utilities for the actual unit rented. In general, utility costs will be

higher if a family leases a unit with more bedrooms. Furthermore,

[[Page 23846]]

utility cost is primarily affected by the character of the unit rather

than the character of the family.

For a regular tenancy in the certificate program, the initial gross

rent may not exceed the FMR/exception rent limit. The maximum gross

rent includes the appropriate utility allowance for the actual unit

rented by the family.

E. Reasonable Accommodation

The final rule adds a new provision allowing the HA to establish a

special higher utility allowance, on a case-by-case basis, as a

reasonable accommodation for a disabled person. The rule provides that

on request from a family that includes a person with disabilities, the

HA must approve a utility allowance which is higher than the applicable

amount on the utility allowance schedule if a higher utility allowance

is needed as a reasonable accommodation in accordance with 24 CFR part

8 to make the program accessible to and usable by the family member

with a disability (Sec. 982.517(e)).

F. Direct HA Payment of Tenant Utility Cost

1. Comments

Comments state that there is a risk of unit damage or harm to other

residents if the tenant does not pay the utility bill. HUD should

require the HA to pay utility reimbursement directly to the utility

company, or should permit direct payment with family consent.

Comments recommend that HUD should eliminate utility reimbursement.

Comments state that the term ``utility reimbursement'' should be used

for the voucher program, and indicates that the family receives the

same utility reimbursement in both programs.

2. HUD Response

The rule provides that if the housing assistance payment exceeds

rent to owner, the HA may pay the balance of the payment either to the

family or directly to the utility supplier to pay the utility bill

(Sec. 982.514(b)). In the certificate program, this case occurs when

there is a utility reimbursement (because the utility allowance exceeds

the total tenant payment). In the voucher program, this case occurs

when the amount of the voucher subsidy (as calculated by the statutory

formula) exceeds the rent to owner; there is no utility reimbursement

(i.e., no payment based on the difference between the utility allowance

and the family contribution).

The rule does not, as suggested by comment, require the HA to pay

certificate utility reimbursement directly to the utility company. The

rule also does not require that the HA must secure family assent for

direct payment. The HA has the election whether to remit the payment to

the family or the utility supplier.

XIV. Reexamination of Family Income

A. Comments

Comments state that HUD should set a uniform policy on interim

reexamination. Comments state that the HA should be required to process

any request for reexamination because of change in income or

composition since the last determination. Income of low income

families, particularly employment income, fluctuates. The HA must

respond quickly to decrease in family income. If a family reports a

decrease in income, HUD should require an HA to promptly increase the

assistance payments.

Comments state that changes should be effective for the month after

the action that results in the decrease. The HA should reduce the

family contribution even if the family delays reporting a decrease in

income, or cannot immediately verify loss of income, e.g., because a

former employer will not verify unemployment.

Comments state that an increase in the family contribution should

not be effective before the second month after family income increases,

or after 30 days notice to the family. A family needs a delay to adjust

and budget for an increase in family income.

An HA asks for authority to require interim re-examination when

family income increases, not just when adding a new family member.

Comment notes that HAs are currently required to process reductions no

matter how small the change in tenant contribution. The HA should be

permitted to limit the number of interim adjustments each year, or to

set a minimum dollar limit.

For families that claim little or no income, a comment recommends

reexamination more frequent than annually.

B. HUD Response

At any time, the HA may conduct an interim examination of family

income and composition (Sec. 982.516(b)(1)). At any time, a family may

ask the HA to conduct a recertification if there is a change in family

income or composition since the last determination

(Sec. 982.516(b)(2)).

Reexamination affects the amount of the subsidy and the family

share of rent. The HA must conduct reexamination in accordance with

policies in the HA administrative plan.

The proposed rule would have provided that the HA must determine

``whether a change should be made'' in response to a change of family

income or composition between annual reexaminations. The final rule

provides that the HA ``must make'' an interim determination effective

``within a reasonable time'' after the family request

(Sec. 982.516(b)(2)). The rule has not adopted the proposal that HAs be

allowed to limit the number of interim reexaminations at the family's

request.

The final rule provides that an HA must adopt policies prescribing

when and under what circumstances the family must report a change in

family income or composition (Sec. 982.516(c)). The rule clarifies that

HAs have authority to initiate an interim reexamination when family

income increases (Sec. 982.516(b)(1)). However, HAs are not required to

initiate an interim reexamination not requested by the family.

The rule also provides that the HA must adopt policies prescribing

how to determine the effective date of a change in the housing

assistance payment because of an interim determination

(Sec. 982.516(d)(1)). At the effective date of a regular or interim

reexamination, the HA must make appropriate adjustments in the housing

assistance payment and family unit size (Sec. 982.516(d)(2)).

If a reexamination is requested by the family, the HA must make the

interim reexamination effective within a ``reasonable time'' after the

family request (Sec. 982.516(b)(2)). Within this broad standard, HAs

have broad authority to set local policies on when to increase the

assistance payment because of a reduction of family income. HUD does

not wish to set a rigid national standard on timing of changes in the

family contribution and assistance payment as a result of an interim

reexamination.

The law provides that ``reviews of family income shall be made no

less frequently than annually'' (42 U.S.C. 1437f(c)(3)(A)). The law

does not prescribe requirements for interim reexaminations between the

annual review. HUD believes that HA's should have broad discretion to

determine policies on conducting interim reexaminations. Over the

years, the interim reexamination policies adopted in HA administrative

plans have seldom been a source of contention. HAs have almost always

acted responsibly in adopting policies on when to hold an interim

reexamination, and when to make effective a change in the family share

and housing assistance payment as a result of the reexamination.

[[Page 23847]]

Common rules for the Section 8 and public housing programs provide

that an HA must reexamine family income and composition at least

annually (Sec. 5.617(a)). A family must submit information or

documentation necessary to determine the family's adjusted income

(Sec. 5.617(b)(2)). This rule confirms that the HA must obtain

verification of factors affecting the family's adjusted income, or must

document why verification was not available (Sec. 982.516(a)).

XV. Project-based Certificate (PBC) Program: Rent to Owner

A. PBC: Comparability Procedures

During the term of a HAP contract, PBC rents must be reasonable

(Sec. 983.256(a)(2)). Comparability applies both to HA determination of

initial rent to owner (Sec. 983.256(a)(1)), and to regular or special

adjustments during the HAP contract term (Sec. 983.254(b)(1) (regular);

Sec. 983.255(c)(2) (special)). For PBC housing, the HA must redetermine

that the current rent to owner is reasonable at least annually during

the HAP contract term (Sec. 983.256(a)(3)). The final rule modifies

procedures for analysis of comparability.

The existing and proposed rule did not specify the form of

comparability analysis for tenant-based or project-based certificate

assistance. For PBC, but not for the tenant-based program, the final

rule provides that the HA must use a standard HUD form to document

comparability of the initial rent (Sec. 983.256(c)(1)(ii)) and adjusted

rent (Sec. 983.256(c)(2)(iii)). For both purposes, HA records must show

the calculation of comparable rent (``correlated subject rent'') on HUD

Form 92273--``Estimates of Market Rent by Comparison.'' Form 92273

lists property ``characteristics,'' and provides a format to enter the

plus or minus dollar value of the differences (adjustments) between the

subject and the comparable units for each characteristic. A separate

Form 92273 must be prepared for each ``unit type'' in the PBC project:

e.g., apartment, row-house, town house or single-family detached.

In determining initial rent, the comparability analysis must use at

least three comparable units in the private unassisted market

(Sec. 983.256(c)(1)(ii)). However, the rule does not specify the

minimum number of comparables that must be used in determining

comparability of the adjusted rent.

The existing and proposed rule do not specify minimum

qualifications of the person who performs a comparability analysis for

determination of initial or adjusted rent. For PBC only, the final rule

provides that the HA must use a qualified ``State-certified appraiser''

(Sec. 983.256(c)(1)(i)) for determination of initial rent. The term

``State-certified appraiser'' is defined at Sec. 983.2 (added by rule

published July 3, 1995), but was not previously used in the rule. A

State-certified appraiser must meet minimum certification requirements

established by the Appraisal Foundation. To assure objectivity, the

rule provides that the appraiser may not have any direct or indirect

interest in the property or otherwise (Sec. 983.256(c)(2)(iii)).

For determination of rent during the term of a PBC HAP contract,

the HA is not required to use a State-certified appraiser. The

comparability study may be prepared by HA staff or by another qualified

person (Sec. 983.256(c)(2)(iii)).

B. PBC: Approval of Rent; HA Certification That Rent Is Reasonable

Under the old rule, all PBC rents were approved by HUD. Under the

new rule HUD must approve initial rent for HA-owned PBC units or PBC

units financed with a HUD-insured multifamily mortgage

(Sec. 983.253(b)). The HA approves the initial rent to owners for PBC

units that are not financed with a HUD-insured multifamily mortgage,

and are not owned by the HA (Sec. 983.253(a)).

In all cases, the HA must certify to HUD that the initial PBC rent

to owner is reasonable (Sec. 983.256(c)(1)(iii)).

C. PBC: Rent to Owner: Annual Adjustments

1. Adjustment by Published Factor

At each annual anniversary, rent to owner is adjusted upon a timely

request by the owner. Adjusted rent is the lesser of:

--The pre-adjustment rent to owner multiplied by the applicable factor

published by HUD,

--The reasonable rent as shown by an HA ``comparability study''; or

--The rent requested by the owner.

(Sec. 983.254(b)(1); Sec. 983.256(c)(2)).

Previously, program rules provided that the rent is adjusted by

applying the most recently published factor: the HUD factor that is in

effect on the contract anniversary date (when the adjustment is

effective). For future HAP contracts, the final rule provides that rent

will be adjusted by the published AAF factor in effect 60 days before

the HAP contract anniversary (Sec. 983.254(b)(2)). This new rule

applies if the Agreement to enter housing assistance payments contract

is entered on or after the effective date of this rule. For earlier

contracts, the applicable factor remains the factor in effect at the

contract anniversary date--since this date is specified in the existing

contract documents.

2. Adjustment Comparability: Comparability Studies

By law and contract, the adjusted rent of housing assisted under

the certificate program may not exceed the reasonable rent for

comparable unassisted units. This limitation is now separately and

independently expressed both in 42 U.S.C. 1437f(c)(2) (A) and (C).

This final rule contains HUD's regulations for conducting

comparability studies under Sec. 1437f(c)(2)(C) in the Section 8 PBC

program (Sec. 982.206(c)(2)). To apply the comparability limitation

under Sec. 1437f(c)(2)(C), the HA must conduct an adjustment

comparability study if requested by the owner of a Section 8 PBC

project. If the owner requests a comparability study under

Sec. 1437f(c)(2)(C), the comparability study must be submitted to the

owner at least 60 days before the HAP contract anniversary. Unless the

comparability study is submitted by this deadline, the rent to owner

(formerly ``contract rent'') is adjusted by applying the annual

adjustment factor.

The proposed rule would have provided that rent reasonableness only

applies to PBC annual adjustments if the requested rent (gross rent,

including the allowance for tenant-paid utility) is 110 percent or more

of the FMR limit. Under the final PBC rule, as in the rule for the

tenant-based certificate program, rent reasonableness always applies at

the annual adjustment of rent to owner (see Sec. 983.254(b)(1);

Sec. 983.256(c)(2)). Factor-adjusted rent may never exceed the

comparable rent.

By law, adjusted rent for a unit assisted in the certificate

program ``shall not exceed'' rent for a comparable unassisted unit in

the market area (42 U.S.C. 1437f(c)(2)(A)). Moreover, rent adjustments

may not result in ``material differences'' between rents for assisted

and unassisted units (42 U.S.C. 1437f(c)(2)(C)). HUD has determined

that any excess over the reasonable rent for comparable unassisted

units is a material difference, and should not be permitted. Any excess

rent is a waste of scarce funds.

Under the proposed rule, the adjustment system would have wholly

ignored rent reasonableness if the factor-adjusted rent did not exceed

110 percent of the FMR. In such cases, the proposed rule afforded no

means of limiting the discrepancy between the factor-adjusted rent and

the reasonable rent for a unit. Under the final rule, the comparability

analysis must be conducted without regard to the relation

[[Page 23848]]

between the adjusted rent and the published FMR. The FMR determines the

general level of market rents in the area. By contrast, the

comparability study determines the rental value of the particular unit,

and is therefore a more precise way of determining the appropriate rent

and subsidy for the particular unit.

The HA must conduct a comparability study to limit PBC rent

increases over the initial rent. The adjusted rent for a contract unit

may not exceed the reasonable rent as shown by a comparability study. A

comparability study analyzes rents charged for comparable unassisted

units (Sec. 982.206(c)(2)(ii)).

The final rule provides that an adjustment comparability study must

be prepared on the standard HUD multifamily appraisal form (HUD Form

92273) (Sec. 982.206(c)(2)(iii)). The same form is also used to

determine comparability of the initial rent at the beginning of the PBC

HAP contract term. For determination of adjustment comparability, the

rule also provides that a comparability study must show how the

reasonable rent was determined. The appraisal must state major

differences between the contract units and comparable unassisted units

(Sec. 982.206(c)(2)(iv)).

3. When Owner Requests Rent Increase; HA Comparability Study

As indicated above, the proposed rule would have required the HA to

conduct a comparability analysis only if the rent requested by an owner

is 110 percent or more of the FMR limit. The proposed rule would have

also provided that the HA must first notify the owner in writing of its

intention to conduct a rent reasonableness study, and then also notify

owner of the study result 30 days after owner requests an increase of

the rent.

The old rule did not specify when the owner must submit a request

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