U.S. Department of Housing and Urban Development

H O U S I N G

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Special Attention of: Notice H 92-60 (HUD)

All Regional Administrators,

Regional Directors of Housing; Issued: 8/10/92

Field Office Managers, Expires: 8/31/93

Development Directors and
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Management Directors Cross References:

Categories A and B Offices Handbook 4571.1 Rev-2

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Subject: Final Closing Section 202 Loans

The Department is making a concerted drive to bring to final

closing Section 202 loans. This Notice restates some existing program

actions and revises some procedures which are intended to assist Field

Office (FO) staff in their efforts to close loans which are

delinquent. Numbers within parentheses refer to paragraphs in

Handbook 4571.1 Rev-2, Section 202 Loan Program for Housing for the

Elderly or Handicapped. Unless this Notice makes a specific change,

Handbook procedures currently in effect continue to apply.

1\. Deferment of amortization. Even though FO Managers have authority

to approve a delay in the start of amortization by deferring

principal payments and executing a modification agreement (MA) (8-8),
delay provides little benefit and should be used rarely. Whenever a FO
delays amortization start, it must execute a MA. Housing

Development (HD) staff should press to have amortization start as soon
as possible after the date of construction completion and cost

certification approval date.

2\. Work stoppages. The Architectural, Engineering and Cost Branch

Chief has responsibility to report promptly to Headquarters (8-9)

whenever work stops for 20 days. Too often, FOs have not notified

Headquarters but have requested mortgage increases on projects after
work had ceased for lengthy periods. Close tracking and timely action to
resolve the cause of the delay will forestall delinquent interest
accruals and subsequent delayed loan closing. A&E staff must impress on
all parties the seriousness of a work stoppage because it

constitutes a default under the Building Loan Agreement.

3\. Cost certification. A number of projects in the pipeline are

constructed, but have not achieved requisite cost certification (9-18).

The Multifamily Housing Representative (MHR) must secure from

all parties the documents needed for cost certification in order to

obtain final loan closing expeditiously. A project\'s file should

reflect the MHR\'s activities in this effort.

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HMEED: Distribution:
W-3-1,W-2(H),W-3(A)(H)(OGC)(ZAS),W-4(H),R-1,R-2,R-3,

R-3-1,R-3-2,R-3-3,R-6,R-6-1,R-6-2,R-7,R-7-1,R-8,R-8-1

Previous Editions Are Obsolete HUD 21 B(3-80)

GPO 871 902

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Cost certification documents should be submitted within 30 to 45

days after cost certification cut-off date for interest, taxes and

insurance; final closing should occur no later than 6 months from the

project\'s construction completion date.

When a sponsor, borrower/owner, or general contractor fails to

cooperate in submitting cost certification documents for pipeline

cases or when a sponsor or borrower/owner does not promptly proceed to

final closing, FO staff should: 1) enter the names of the sponsor and

borrower corporations and their principals into the previous

participation automated system in accordance with outstanding 2530

procedures, and 2) consider a limited denial of participation or other

sanctions, as appropriate.

4\. Holdback releases. When a delay in proceeding to final

closing exists but construction is complete and the general contractor

has fulfilled the terms of its contract, retaining the construction

holdback until final closing (8-2e) may cause the contractor financial

hardship. FOs, in such cases, may permit release prior to final

closing. Before granting such a request, HD staff must assure that

the following requirements are satisfied:

a\. All work under the construction contract has been inspected

and approved by government authorities and by a rating or

inspection organization, bureau, association or office having

jurisdiction.

b\. Appropriate state or local governments have issued occupancy

certificates for all units.

c\. Contractor has satisfied the applicable latent defects escrow

requirement.

d\. Contractor has submitted its disclosure of unpaid obligations

on form HUD-92023, Request for Final Endorsement.

e\. Borrower has submitted its requisition, accompanied by the

Contractor\'s Prevailing Wage Certificate on form HUD-92448,

Contractor\'s Requisition, and final survey.

f\. Additional FO responsibilities:

1\) Issue Permissions(s) to Occupy, Form FHA 2485, for all

project units;

2\) Complete review of contractor\'s cost certification, if

applicable;

3\) Determine that Davis-Bacon payroll requirements have been

satisfied;

4\) Obtain consent of the Surety;

5\) Determine that no liens have been filed against the

project

5\. Loan increase. FO staff should apply paragraph 8-5 when cost

certification review discloses that a project qualifies for a loan

increase. In processing a loan increase request, all net income also

must be used to offset the requested increase. Any related rent

increase will be effective as outlined in items 6 and 7 below.

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6\. Rent increase based on pre-occupancy budget. One of the

items Loan Management (LM) must review at the pre-occupancy conference

is the proposed operating budget (8-10b(3)). Fair Market Rents (FMR)

relate to project development and cost and as long as the original

mortgage amount does not change, FMRs cease to apply to Sec. 8

contract rents after cost certification cut-off date.

As paragraph 8-10 indicates, LM staff is involved at various

stages of a project during development and at initial occupancy

assumes responsibility for project operation activities whether

occupancy occurs before or after cost certification; HD retains

responsibility for project development activities up to and through

final loan closing. After the pre-occupancy conference (8-10b), LM

staff should review the proposed budget with operating expenses used

in project development and, when warranted, process an increase in

contract rents so new rents can take effect concurrently with or as

close as possible to cost certification cut-off date. Paragraph 8-11a

should be annotated to state that FMRs do not apply after cost

certification cut-off date.

It should be noted that authority to raise rents at the time of

occupancy before final loan closing does not relieve FO Development

staff from its responsibility to process initial contract rents with

adequate, appropriate operating expenses based on the FO\'s expense

data. Some FOs have systematically underestimated operating expenses

during conditional and firm commitment processing to obtain a maximum

mortgage amount; such practices are not acceptable. Provisions of

this Notice in no way relieve FOs from their responsibilities for

eliminating such practices during the development process.

7\. Rent increase after occupancy. A project may have started

rent-up using contract rents developed in loan processing and monthly

accounting reports reflect that operating expenses have been

underestimated. LM staff should process a rent increase as soon as

possible to avoid having to approve an inordinately large increase at

a later date (8-10d); the increase may need to be made retroactive to

the date of initial occupancy when it occurs after cost certification

date. LM can approve a retroactive rent increase before cost

certification only when initial rental rates are less than the

project\'s FMRs. Contract rents can be adjusted later should the loan

amount change (8-5e and 9-24). In the event of a loan decrease and

reduced contract rents, any Sec. 8 over-payment can be adjusted by

offset from future vouchers.

8\. Starting Section 8 payments. Initial rent-up usually begins

at or before a project has reached final completion. Allowed

certified costs used to support the maximum loan amount may include

interest for up to 60 days beyond the date of final completion as

shown on form HUD-5379. This maximum of 60 days provides time for

initial rent-up. To avoid an accrual of interest on the construction

loan, HD staff should initiate expeditiously procedures for occupancy

approvals so Sec. 8, Housing Assistance Payments Contract (HAP), funds

can start as soon as possible (8-12).

LM staff, in turn, should contact the borrower/management agent

and advise that the requirement for submitting monthly accounting

reports starts the month occupancy starts.

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9\. Loan Payment offset before final closing. When the borrower

vouchers for Sec. 8 payments before final loan closing, LM staff

shall instruct RAD by memorandum to offset loan payments (principal

and interest) from Sec. 8 voucher proceeds. The monthly payment is

stated on the Firm Commitment for Direct Loan Financing, FHA

Form 2432. This offset will enable the borrower to avoid continuing

accrual of interest thereby reducing financial obligations at final

closing. If monthly accounting reports reflect slow rent-up, LM staff

may need to adjust the amount of offset so the borrower will have

sufficient funds to pay operating expenses and notify RAD in writing

the revised amount to offset.

An audited operating statement for the period from initial

occupancy to cut-off date for cost certification, as set forth in

paragraph 9-22, is an item required for cost certification. Any funds

(except as noted in paragraph 5 above) generated during occupancy

which exceed operating expenses should appear on monthly accounting

reports and can be used to reduce accrued interest at final closing.

The requirement for a supplemental income statement called for in

paragraph 9-23 no longer applies and should be so noted.

10\. Sponsor advances. Should a borrower need additional funds to

close a loan beyond those available under the Sec. 202 loan because

interest has accrued, the sponsor could advance the funds and the

borrower usually can execute a residual receipts note (1-8b) to the

sponsor for the amount of the advance. Qualifying advances also

include: cost of items eligible under the loan, land cost which

exceeds the amount HUD could allow in the loan, and operating advances

not covered by vacancy payments; costs of excess amenities are

ineligible.

11\. Reinstatement plan. HUD defines as current a delinquent loan

which is operating under a HUD-approved reinstatement plan.

Therefore, a loan may be able to go to final closing, although in

default, when the borrower has entered into a plan designed to result

in a current loan. Such a plan can include a workout arrangement (WO)

with one or more extensions, but generally not more than five years

total. The final component of the reinstatement plan may be a

modification agreement (MA) to amortize the principal balance over the

loan\'s remaining term.

Because the loan is not finally closed, LM and Housing Development

(HD) staffs should work together in preparing WO terms and

discussing them with the borrower. The borrower must use any funds

available to reduce the delinquency.

To determine the amount of the delinquency, all funds relating

to the loan which are not restricted for specified uses should be

applied to reduce the total, i.e., remaining contingency funds,

minimum capital investment, any moneys generated from occupancy

which exceed essential operating expenses (see item 5, above),

reserve for replacements (R/R) and residual receipts, if any; do not

use tax and insurance escrow or hold-backs for project completion.

Because the project loan reflects a deficit, all or part of the

minimum capital investment can be used to reduce the delinquency.

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The borrower/sponsor must provide a written plan for raising the

amount of the delinquency which remains after reduction by applying

available funds, as above. This plan should include details of the

sponsor\'s ways and means for producing the funds, the time frames

within which the funds are to be raised and anticipated total dollars

that will result. The WO must specify the date and amount of each

borrower/sponsor payment.

Funds will be applied to the delinquency and will not be considered

any part of the sponsor\'s contribution under workout terms. HUD

may waive monthly R/R deposits during the first WO term, but may

reinstate partial or total monthly payments in a subsequent WO. LM

staff may condition WO approval on replacing project management when

existing management failed to take preventive or remedial actions.

LM staff must advise sponsors/borrowers that failure to make any

payment by the time specified in a WO may result in HUD initiating

remedies provided under the Regulatory Agreement or taking other

appropriate remedial action.

The initial WO term should not exceed two years with a provision

for HUD to review and to extend it for an additional year or years on

the same or revised terms, up to a maximum of five years under this

reinstatement plan. A two-year initial WO term generally will provide

sufficient time to determine the success of the borrower\'s

reinstatement plan and whether or not a WO extension will be needed.

When a sponsor agrees to make a financial contribution under a

reinstatement plan, HUD will agree to increase Section 8 payments to

eliminate an interest delinquency when the sponsor or borrower has

not been the cause of delay in final closing and resulting

delinquency. The sponsor from its own funds must provide \$1.00 for

each \$3.00 of Sec. 8 proceeds, all of which must be applied to reduce

accrued interest. The sponsor shall not be permitted to obtain a

residual receipts note for any part of funds it provides under these

conditions.

For example, the borrower enters into a two-year workout

arrangement with provisions which include a HUD-approved rent increase

which averages \$6.00 per month for each of the 50 income-producing

units = \$300 per month, \$3,600 per year and \$7,200 during the
two-year

workout term. The sponsor\'s contribution for the same two-year period

totals \$2,400: \$2.00 per month for each of the 50 income-producing

units = \$100 per month and \$1,200 per year. At the end of the two

years, interest delinquency would be reduced \$9,600 (\$7,200 from Sec.

8 + \$2,400 from the borrower).

12\. Borrower Payment. The borrower\'s contribution can be made to

the Regional Accounting Office (RAD) by check each month or in larger

lump sum payments at specified times, such as every six months, but at

least once a year based on the workout\'s terms and dates. Some

sponsors may be better able to raise funds to reduce the delinquent

interest as part of an annual fund raising program, others may use

income generated from bequests. Of course, any funds remaining in the

operating account at the end of the project\'s fiscal year, which

otherwise would be deposited to residual receipts, must be sent to RAD

for application to the delinquent interest.

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13\. Workout Arrangement. Procedures and format in Hdbk 4350.1,

chpt 11, Workouts for HUD-Held Mortgages, generally apply for Sec. 202

loans. Because some WO provisions setforth in paragraph 3-4 and

Appendix 4 are inappropriate for Sec. 202, a WO format which can be

used for Sec. 202 is furnished as Attachment 1. However, because both

HD and Housing Management (HM) are jointly involved in developing the

WO, HM should prepare and HD concur on the letter to the borrower

transmitting the WO for execution. In FOs the Manager should sign the

letter and in Regional Offices (RO) the Director of Housing; HUD\'s

execution of the WO should be at the same level.

Following HUD execution, LM should send the original WO to RAD

(not MIAS as indicated in paragraph 3-5D) and distribute the WO copies

as noted in paragraph 3-5E. The FO project file copy goes to HD for

use in connection with final loan closing and the Headquarters copy

should be directed to: Assisted Elderly and Handicapped Housing

Division, Office of Elderly and Assisted Housing, together with a copy

of the cover letter to the borrower.

14\. Review of Workout. As with any HUD-approved WO, LM staff

must review the project\'s operation and loan status several months

before WO expiration to determine what additional remedial efforts, if

any, are needed. Terms of the existing arrangement may need to be

adjusted. HUD may approve several increases in Sec. 8 payments to

reduce the interest delinquency based on the sponsor\'s ability to

provide \$1.00 for each \$3.00 of subsidy.

15\. Rent Increase. LM staff should process as usual a rent

increase based on the annual budget and add the amount of Sec. 8 funds

approved as part of the WO to determine the new contract rents. To

assure that the amount added for the WO actually will be applied to

the interest delinquency, LM must advise RAD in writing the dollar

amount to offset each month from the project\'s voucher. This

memorandum also should state the annual amount of the borrower\'s

payment toward the delinquency and time frame(s) for payment as

specified in the WO.

16\. Contract Rent Review. After a loan is fully current, LM

staff must review the project\'s annual budget and the Sec. 8 payment

to determine whether or not the monthly payment should be adjusted.

If a portion of the payment is not needed to cover increases in

operating expenses or to replenish the R/R account, LM staff must:

reduce contract rents, adjust the Sec. 8 payment, notify the borrower

of the newly approved rental rates and the adjusted R/R deposit and

advise RAD to offset payments called for in the amortization schedule.

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17\. Modification Agreement. A mortgage modification serves as

the final step in a reinstatement plan. The loan must be current

through interest because modification of a Sec. 202 loan is limited to

recasting the principal balance over the remaining term of the

mortgage. A MA changes the terms of the note and mortgage and should

be recorded in conformance with state and local law. After the FO

Manager or RO Director of Housing executes a MA, LM should send the

original to RAD with a Form FHA-2409, Amortization Schedule Request.

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Assistant Secretary for Housing

\- Federal Housing Commissioner

Attachment

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Attachment 1

Section 202 - Workout Arrangement Format

Note: See Handbook 4350.1, chapter 11, appendix 4, for the

Heading and following provisions: 1. Possession.

2\. Junior Obligations. 6. Monthly Accounting Reports.

8\. Criminal Sanctions for Misuse of Project Funds.

3\. Payment Provisions.

a\. The monthly mortgage payment for interest and principal

currently is \$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_. To
guarantee this payment, the

Borrower agrees that HUD shall withhold this amount from monthly

Section 8 proceeds for the project. The Borrower further agrees that

HUD also shall withhold monthly
\$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ which HUD will

apply to reduce accrued delinquent interest, currently

\$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.

b\. Any funds over \$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ remaining in the
operating account

each month after paying project operating expenses and making escrow

deposits will be remitted to HUD in addition to the amounts withheld,

as above. Such funds will be sent by the 10th of the month to the

Regional Accounting Division (RAD), HUD Regional Office,

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address)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

c\. In addition to amounts cited above, to reduce delinquent

interest stated in 3.a., the Borrower shall remit to RAD

\$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ during the term of this
Arrangement as stated

below:

\$ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_\_\_\_(Date)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\$ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_\_\_\_(Date)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Note: If payments are to be made monthly, so specify.

d\. Monthly deposits to the Reserve Fund for Replacements escrow

during this Arrangement term are waived (or reduced to
\$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_).

4\. Performance Review.

At least three months before expiration, HUD will review the

Borrower\'s performance under this Arrangement. If the Borrower has

met its responsibilities and the interest delinquency has been reduced

to at least \$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, HUD will agree
to extend this

Arrangement under existing or revised terms.

5\. Mortgage Modification. If the Borrower has fully complied with

the terms of this Arrangement, as
of\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, HUD

agrees to recast any delinquent principal at the Note interest rate

amortized over \_\_\_\_\_\_\_\_\_\_ payments, the remaining term of the
mortgage.

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Attachment 1

7\. Cancellation Clause. This Arrangement is on a month-to-month

basis. The Secretary agrees to take no action because of the existing

monetary default, provided the Borrower makes the required payments

and adheres to other requirements of this Arrangement. The Borrower\'s

failure to meet these terms will be sufficient cause for the Secretary

immediately to terminate the Arrangement and to commence foreclosure

action, and will serve as grounds for the Department to consider

taking administrative sanctions against the Borrower including, but

not limited to, suspension or debarment from participation in HUD

programs.

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\*U.S. Government Printing Office: 1992 - 312-218/60233