Federal Register / Vol. 85, No. 246 / Tuesday, December 22, 2020 / Rules and Regulations 83435 

DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

24 CFR Part 266 

[Docket No FR–5881–F–02] 

RIN 2502–AJ35 

Section 542(c) Housing Finance 

Agency Risk Sharing Program 

AGENCY: Office of the Assistant 

Secretary for Housing-Federal Housing 

Commissioner, HUD. 

ACTION: Final rule. 

SUMMARY: Through the Section 542(c) 

Housing Finance Agency (HFA) Risk 

Sharing program, HUD enters into risksharing agreements with qualified state 

and local HFAs so they can provide 

FHA (Federal Housing Administration) 

mortgage insurance and credit 

enhancement for new loans on 

multifamily affordable housing 

properties. This final rule amends the 

program’s existing regulations, to better 

align with the policies of other HUD 

programs, reflect current industry and 

HUD practices, and conform to statutory 

amendments. Additionally, this rule 

provides HUD with greater flexibility to 

operate the Section 542(c) HFA Risk 

Sharing program more efficiently and 

provides HFAs which accept a greater 

share of the risk of loss on mortgages 

insured under the program with 

expanded program delegation. This rule 

also updates outdated references and 

terminology and clarifies other 

provisions. 

DATES: Effective January 21, 2021. 

FOR FURTHER INFORMATION CONTACT: 

Carmelita A. James, Office of 

Multifamily Production, Office of 

Housing, Department of Housing and 

Urban Development, 451 7th Street SW, 

Room 6146, Washington, DC 20410; 

telephone number (202)–402–2579 (this 

is not a toll-free number). Persons with 

hearing or speech impairments may 

access this number through TTY by 

calling the toll-free Federal Relay 

Service at 800–877–8339. 

SUPPLEMENTARY INFORMATION: 

I. Background 

Section 542 of the Housing and 

Community Development Act of 1992 

(12 U.S.C. 1715z–22) (Section 542) 

directs HUD to carry out programs 

through FHA to demonstrate the 

effectiveness of providing new forms of 

Federal credit enhancement for loans on 

multifamily affordable housing 

properties which are underwritten, 

processed, serviced, and disposed of by 

HFAs. HUD and the HFAs share in the 

risk of loss, which enables the HFAs to 

provide more mortgage insurance and 

credit for new multifamily loans. Under 

the program, qualified state and local 

HFAs are delegated to originate and 

underwrite loans for new construction, 

substantial rehabilitation, acquisition, 

refinancing, and housing for the elderly. 

HFAs may elect to share from 10 to 90 

percent of the loss on a mortgage with 

HUD. In the event of a claim, HFAs will 

reimburse HUD for their portion of the 

loss pursuant to their risk-sharing 

agreement’s terms. 

On March 8, 2016, HUD proposed a 

new rule to update the Section 542(c) 

HFA Risk Sharing regulations set out in 

24 CFR part 266, which were last 

updated over fifteen years ago. 

Additional details about the proposed 

rule may be found at 81 FR 12051 

(March 8, 2016). 

II. This Final Rule 

This final rule follows publication of 

the March 8, 2016 proposed rule and 

considers the public comments 

received. HUD is adopting the proposed 

rule as final with no substantive 

changes. 

III. Discussion of Public Comments 

HUD received eight public comments 

on the proposed rule from housing and 

finance agencies, a law firm, and other 

interested parties. One commenter did 

not discuss the proposed rule and 

therefore the comment will not be 

addressed here as it is outside the 

rulemaking’s scope. In general, the 

comments received supported the rule, 

with no expressed opposition. 

The comments largely contained 

requests for clarification, suggested 

technical changes, and provided 

additional recommendations. Several 

commenters stated the proposed rule’s 

revisions were necessary updates that 

would help streamline the regulation, 

add flexibility, and make the program 

more effective. In addition, commenters 

stated they appreciated HUD’s extensive 

outreach and exchanges with HFAs 

prior to issuing the proposed rule. 

HUD appreciates the time that 

commenters took to provide helpful 

information and valuable suggestions. 

A. Affordable Housing Definition 

Comment: The revisions to the 

definition of ‘‘affordable housing’’ are 

helpful. Commenters supported HUD 

amending the proposed rule’s definition 

of ‘‘affordable housing.’’ One 

commenter supported the proposed 

revisions because they would expand 

the Section 542(c) program to better 

support loans on projects with Federal 

low-income housing tax credits (LIHTC) 

and synchronize the risk sharing 

program with the LIHTC rules. 

HUD Response: HUD appreciates the 

support but emphasizes that the revised 

definition of ‘‘affordable housing’’ is 

technical and does not expand the 

program’s scope. As discussed in the 

proposed rule, the existing definition of 

‘‘affordable housing,’’ as well as the 

definitions of ‘‘gross rent’’ and 

‘‘supportive services,’’ are unnecessarily 

repetitive so the proposed change 

removes redundant verbiage and 

simplifies the regulatory language 

without substantively changing the 

program’s scope. This rule amends the 

‘‘affordable housing’’ definition to more 

closely conform to the statutory 

language in Section 542(c)(7) of the 

Housing and Community Development 

Act of 1992 and meet the requirements 

for a qualified low-income housing tax 

credit project under section 42(g) of the 

Internal Revenue Code. 

Comment: The rule should clarify that 

cooperatives meet the proposed rule’s 

definition of ‘‘affordable housing,’’ and 

that ‘‘gross rent’’ includes charges for 

the occupancy of a cooperative unit. A 

commenter stated that the existing RiskSharing regulations make it clear that 

loans for cooperatives with five or more 

units are eligible for Risk-Sharing 

mortgage insurance, but the rule’s 

revision of the ‘‘affordable housing’’ 

definition makes that less clear. 

According to the commenter, the 

revision should incorporate all the 

requirements for a qualified low-income 

housing project that are set forth in 

I.R.C. Section 42(g) and not simply the 

gross rent rules that are required by the 

Section 542(c) Risk-Sharing statute. 

The commenter stated further that 

Section 42(g) contains several LIHTCspecific concepts that may need to be 

disregarded when they are applied to 

non-LIHTC, Risk-Sharing projects. 

Further, Section 42(g) should not be 

interpreted as implying that 

cooperatives are not eligible for Risk 

Sharing. The commenter suggested 

clarifying the definition of affordable 

housing so that, for purposes of the 

Risk-Sharing regulations, any reference 

to a residential rental project in Section 

42(g) includes cooperative projects. 

In addition, the commenter stated that 

the proposed rule continues existing 

cooperative-related language from the 

current rule that is unnecessarily 

confusing because charges for a 

cooperative unit occupancy are said to 

be a form of utility allowance. Lastly, 

the commenter said it is awkward to 

refer to cooperative occupancy charges 

in such terms, which are otherwise 

known as ‘‘maintenance fees,’’ and the 

final rule should specify that gross rent, 


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and not just the utility allowance, is 

included in the charges for a 

cooperative unit occupancy. 

HUD Response: HUD appreciates the 

comments on ensuring that the rule is 

clear that cooperative units are eligible 

as ‘‘affordable housing’’ for purposes of 

the Risk Sharing program, if they 

otherwise meet the Risk Sharing 

statute’s other requirements. This rule 

continues to apply to cooperative 

housing units, and HUD does not 

believe any additional changes are 

necessary to confirm that. 

B. Housing Finance Agency 

Requirements 

Comment: Be consistent regarding 

rating requirements. A commenter 

stated the HFA qualifier with an 

‘‘overall rating of ‘A’ on general 

obligation bonds’’ used in § 266.110(a) 

and § 266.120(e)(5) should also be used 

in § 266.100(a)(l). This commenter also 

indicated that while HFAs may qualify 

to participate in the program if they 

carry an issuer credit rating of ‘‘A’’ or 

better, the regulations do not provide 

that HFAs may qualify if they receive a 

rating of ‘‘A’’ or better for their general 

obligation bonds. In addition, the 

commenter said that, considering this, 

an ‘‘AA’’ or ‘‘AAA’’ rating would 

technically not be sufficient, and 

recommended that the rule specify in 

§ 266.100(a)(1), § 266.110(a), and 

§ 266.120(e)(5) that a HFA can qualify 

for the program if it receives a rating of 

‘‘A’’ or better for its general obligation 

bonds. 

The commenter also said it assumes 

that references to ‘‘general obligation 

bonds’’ in the rule mean bonds whose 

rating depends on the issuer’s general 

ability to pay, and area proxy for an 

issuer rating, and are not intended to 

include general obligation bonds that 

also have pledged collateral that serves 

as the basis for the rating. The 

commenter said that the mere fact that 

loans are pledged does not necessarily 

mean they will be the basis for the bond 

rating, although they often are. 

HUD Response: The commenter’s 

requested language is already included 

in § 266.100(a)(2), which remains 

unchanged, and as such there is no need 

to change § 266.100(a)(l). 

Comment: Reconsider reviewing 

underwriting standards, loan terms and 

conditions, and asset management and 

servicing procedures for HFAs with 

Level II approval every five years. A 

commenter suggested that reviewing 

Level II HFA underwriting standards 

every five years to align them with FHA 

standards is not necessary and should 

only apply to ‘‘large claims made.’’ 

HUD Response: HUD has the statutory 

authority to impose additional 

underwriting criteria, loan terms, and 

conditions when HUD assumes more 

than 50% of the risk of loss and may do 

so for a variety of risk management and 

program oversight reasons. HUD 

interprets the commenters reference to 

‘‘large claims made’’ as intending to 

refer to mortgage insurance 

commitments issued for large loans. 

HUD disagrees that reviewing 

underwriting standards, loan terms and 

conditions only as they apply to large 

loans would be sufficient to manage risk 

and to protect the Risk Sharing 

program’s safety and soundness. 

Comment: Termination. One 

commenter objected to the proposed 

change allowing HUD to withdraw 

program approval for Level II HFAs that 

do not adopt new underwriting 

standards, loan terms and conditions, 

and asset management and servicing 

procedures that HUD may establish 

every five years. The comment stated 

that termination seems inappropriate for 

HFAs that are otherwise performing 

under the program. The commenter 

asked that HUD allow for a reasonable 

transition period and establish 

processes the HFAs can use to negotiate 

HUD’s new standards and to appeal a 

possible termination. 

HUD Response: The language in the 

proposed rule states that, every five 

years, HUD will review the 

underwriting standards, loan terms and 

conditions, and asset management and 

servicing procedures for HFAs with 

Level II approval, under which HFAs 

assume less than 50% of the risk of loss 

and that HUD may require changes to 

these standards and procedures as a 

condition of continued Level II 

approval. The rule does not state that 

HUD will necessarily establish new 

procedures every five years, but only 

that HUD will review the standards and 

procedures of HFAs with Level II 

approval every five years. Under this 

regulation, HUD may require changes to 

these standards and procedures to 

ensure they are updated and that they 

conform to HUD’s standards and 

requirements, but the rule does not state 

that HUD will necessarily terminate an 

HFA’s approval. As noted in the 

proposed rule’s preamble, many of the 

standards used by HFAs with Level II 

approval have been in place for more 

than 20 years without being reviewed by 

HUD, and may likely be outdated. 

C. Program Requirements 

Comment: Clarify eligibility 

requirements for existing projects and 

projects receiving Section 8 rental 

subsidies or other rental subsidies. A 

commenter indicated that 

§ 266.200(c)(4), (5), and (7) of the 

proposed rule, which describe eligibility 

requirements for existing projects, relate 

to projects with Section 8 contracts, but 

none of them states that explicitly, and 

that beginning each of these paragraphs 

with a phrase such as ‘‘If the project is 

the subject of a Housing Assistance 

Payments (HAP) contract . . .’’ would 

provide clarity. Alternatively, this 

commenter said that § 266.200(c)(4), (5), 

and (7) could be consolidated into a 

single subsection that addresses Section 

8 assisted projects. 

HUD Response: HUD agreed with the 

suggestions. Sections 266.200(c)(4), (5) 

and (7) were consolidated into a single 

subsection (5) for Section 8 assisted 

projects which begins with the phrase 

‘‘If the project is subject to a Housing 

Assistance Payment (HAP) contract 

. . . .’’ This paragraph was moved to 

clarify the circumstances to which this 

applies, after the general provisions in 

§ 266.200. 

Comment: Differences between 

§ 266.200(c)(7) and § 266.200(d). Under 

Section 266.200(d), for projects that 

receive rental subsidies, the HUD 

insured mortgage may not exceed an 

amount supported by the lower of the 

contract rents under the rental 

assistance agreement or market rents, 

except for Section 202 projects. Under 

Section 266.200(c)(7), the HUD-insured 

mortgage may not exceed an amount 

supported by the lower of the unit rents 

under the rental assistance agreement or 

unit rents at unassisted projects in the 

market area, except for Section 202 

projects. The commenter asked why 

both provisions were necessary and how 

they differed. 

HUD Response: HUD agreed with the 

commenter that the language in both 

Sections is similar, however, the 

difference is intentional. Section 

266.200(c)(7) has requirements for 

existing projects which may or may not 

have Section 8 subsidies, whereas 

Section 266.200(d) has requirements 

exclusively for projects receiving 

Section 8 subsidies. 

Comment: Exception for 202 projects. 

The exception for 202 projects in the 

revised § 266.200(d) seems to contradict 

the preamble’s explanation that the 

amendment to this Section would result 

in Level I HFAs being subject to the 

same underwriting standards as for 

other Section 202 projects, in that the 

loans may be underwritten to contract 

rents. The commenter stated that the 

‘‘same underwriting standard’’ refers to 

the program allowing Section 202 

projects to obtain Risk Sharing loans 

which are underwritten based on 

contract rents, regardless of market 


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rents, and asked that HUD provide 

clarity. 

HUD Response: HUD reviewed the 

proposed § 266.200(b)(7) and 

§ 266.200(d) and determined that Level 

I participants may underwrite Section 

202 projects to contract rents, regardless 

of market comparable. 

Comment: Clarify § 266.200(c)(4). 

Commenters asked HUD to clarify that 

§ 266.200(c)(4), which requires that 

property owners agree to renew the HAP 

contract for a 20-year term, applies only 

to Section 8 Project-Based Rental 

Assistance (PBRA) and not Section 8 

Project-Based Vouchers (PBV). The 

commenters said that administering 

agencies are not obligated to extend PBV 

contracts and can let them expire, 

unlike PBRA. Furthermore, even if 

administering agencies were willing to 

extend PBV contracts, uncertainty 

regarding third-party consent 

requirements could deter owners from 

using the Section 542(c) program to 

preserve affordable housing. 

Additionally, commenters said the 

regulatory requirements for the term of 

the PBV contracts could make 

compliance with the requirement in this 

rule problematic, as the regulations 

impose limitations on the total, 

aggregate term allowed for a PBV 

contract. See 24 CFR 983.205. 

Commenters also asked HUD to 

clarify whether the requirement for a 20- 

year renewal of a HAP contract is 

deemed satisfied for projects with an 

existing HAP contract if the owner 

commits to a future extension upon the 

existing HAP contract’s expiration, or if 

it requires that the owner enter into a 

new 20-year HAP contract at the closing 

on the loan. Commenters said the 

former should achieve HUD’s policy 

goals and will avoid any potential 

detrimental impact on a project’s 

appraised value that could result from 

extending HUD’s use agreement now, as 

would be required upon certain types of 

HAP contract extensions. 

HUD Response: The PBV program 

permits 20-year contract extensions at 

any time during the contract term, 

effectively creating a 40-year contract 

option. Extensions are at the PHA’s 

discretion, so a PHA could decide not 

to extend a PBV contract, since PBVs are 

not like PBRA, where owners have a 

general right to renewal under the 

Multifamily Assisted Housing Reform 

and Affordability Act. However, even if 

the administering agencies were willing 

to extend a PBV contract at some point 

during its term, HUD recognizes that 

uncertainty regarding third-party 

consent requirements could deter 

owners from using the Risk Sharing 

program to preserve the affordable 

housing. However, as noted above, a 

contract extension could be agreed to at 

the time of loan closing with the 

mortgagee’s consent requested at that 

time. The commenter stated that the 

regulatory requirements for the PBV 

contract’s term (24 CFR 983.205) could 

make compliance with the requirement 

in this rule problematic, as the 

regulations impose limitations on the 

total, aggregate term allowed for a PBV 

contract. Section 983.205 has been 

modified by the Housing Opportunity 

Through Modernization Act (HOTMA), 

with the initial and extension term 

language contained in the FR 

Implementation Notice dated 1–18–17, 

with further guidance provided in 

Notice PIH 2017–21. Eventually, HUD 

will codify these changes. However, 

HOTMA allows the agency to initially 

implement by FR Notice, which is what 

has occurred. 

Comment: Residual receipts. Further, 

commenters asked whether the 

provision in the proposed rule regarding 

residual receipts to fund future Housing 

Assistance Payments in § 266.200(c)(5) 

only applies to so-called ‘‘New 

Regulation’’ HAP contracts, pursuant to 

HUD Notice 2012–14 and the FAQ 

memo of October 2, 2012, and asked 

that the rule be specific as to which 

HAP contracts it applies in order to 

avoid restricting distributions where the 

HAP contract itself has no limit. 

HUD Response: Notice 2012–14 

applies to contracts subject to the 

revised Section 8 regulations. HUD will 

specify the applicable HAP contracts in 

the final rule, in accordance with Notice 

2012–14, which states: ‘‘For projects 

subject to 24 CFR part 883, in effect as 

of February 29, 1980, the State Housing 

Agency, rather than HUD, is entitled to 

make the determination that project 

funds are more than the amount needed 

and to require that the excess be 

deposited into an interest-bearing 

account to be used for project 

purposes.’’ See 24 CFR 883.306(e). 

Comment: Expand the underwriting 

exception. Commenters requested that 

the rule’s exception regarding 

underwriting to the lower of market or 

HAP rents be expanded. Commenters 

said that § 266.200(c)(7) and 

§ 266.200(d) generally require 

underwriting rents to be the lower of 

market or Section 8 rents, but there is 

an exception to underwrite at higher 

HAP contract rents on Section 202 

refinances. Commenters said there are 

other exceptions available for other 

multifamily loans insured by FHA, 

specifically, if the long-term HAP 

contract rents are above market rents 

and are not subject to being reset to 

market (for example, Mark-to-Market 

(M2M), Option 4, or some Option 5 

Low-Income Housing Preservation and 

Resident Homeownership Act 

(LIHPRHA) projects). The FHA 

Multifamily Accelerated Processing 

(MAP) program allows rents to be 

underwritten to the above-market HAP 

contract rents for the full term of the 

contract. Commenters suggested that the 

proposed rule incorporate comparable 

provisions for the HFA Risk-Sharing 

Program. 

Another commenter asked that HUD 

extend the flexibility provided for 

Section 202 projects to situations in 

which Risk-Sharing is used to finance 

loans for projects under other programs, 

such as M2M, Option 4 and some 

Option 5 LIHPRHA deals. 

HUD Response: Under M2M, once a 

property has gone through an M2M 

restructuring (which sets the Section 8 

rents at market), the only permitted rent 

increase is an annual Operating Cost 

Adjustment Factors increase. HUD is 

unable to act on the commenter’s 

suggestion regarding Section 202 

projects since that program is governed 

by its own statutory and regulatory 

structure, which is beyond the scope of 

the Risk Sharing regulation. 

Comment: Expand the Risk-Sharing 

program. A commenter recommended 

that HUD expand project eligibility to 

include financing workforce housing 

projects where the resident could earn 

up to 80–100 percent of Area Median 

Income (AMI). This commenter said 

that, currently, workforce transactions 

where rents are above 60 percent of AMI 

and do not meet the minimum set-aside 

defined in the Handbook cannot be 

financed under Risk Sharing. This 

commenter also recommended that 

HUD expand the definition of senior 

properties for the Risk Sharing program 

to include renters age 55 and older in 

order to provide greater flexibility for 

HFAs and to align with current industry 

practices defining a senior property. 

Further, the commenter asked that the 

regulation clarify whether manufactured 

housing rental communities can be 

insured under the Section 542(c) 

program, assuming they meet other 

program requirements. 

HUD Response: Expanding project 

eligibility to include residents earning 

up to 80 to 100 percent of AMI would 

not conform to the program’s statutory 

requirements, under which the 

affordability restriction must meet the 

requirements of I.R.C. § 42(g). Projects 

restricted to renters age 55 and older are 

required to comply with the Fair 

Housing Act’s exemption and HUD’s 

Housing for Older Person regulations in 

24 CFR part 100, subpart E. 

Manufactured housing rental 


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communities are eligible for Risk 

Sharing in accordance with 24 CFR 

266.200(a)—Eligible Projects, if all other 

statutory and regulatory requirements of 

the Risk Sharing program are met. 

Comment: Revise HFA environmental 

review requirements. A commenter said 

HFAs that serve as a Responsible Entity 

(RE) for conducting the environmental 

assessment for Risk-Sharing mortgages 

must follow 24 CFR part 58 regulations, 

but that HUD follows 24 CFR part 50 for 

mortgage insurance applications 

processed under the MAP program. The 

commenter suggested changing the RiskSharing regulations to allow HFAs that 

take at least 50 percent risk of loss to 

utilize 24 CFR part 50 for the 

environmental reviews in order to align 

Risk-Sharing loans with the same 

standards as the MAP program, which 

will result in more streamlined reviews 

and a more expedited process. 

HUD Response: The National 

Environmental Policy Act required 

environmental reviews are lengthy and 

create an additional responsibility for 

already overburdened HUD field offices. 

To lessen this burden and to facilitate 

more expeditious processing of 

applications for mortgage insurance, 

HUD will continue to serve in a 

monitoring role for environmental 

reviews performed by the HFAs. 

Assumption of this authority is critical 

to giving the HFAs the maximum 

authority to carry out the Risk Sharing 

program’s intent. 

D. Mortgage Requirements 

Comment: Provide further 

information about the rule’s fully 

amortizing loan requirement and 

exceptions. A commenter stated that 

§ 266.410(e) provides that the rule’s 

fully amortizing loan requirement does 

not apply to Level I participants, where 

the loan can have a minimum 17-year 

term and the HFA’s underwriting 

standards have been approved by HUD. 

This commenter stated that the industry 

standard for a LIHTC first mortgage loan 

is 30-year amortization with a 17-year 

term, and the commenter said it 

presumed this provision is intended to 

apply to properties of this type. The 

commenter also said the rule does not 

require a specific amortization period 

since HUD has the ultimate veto of the 

HFA’s underwriting criteria. Another 

commenter suggested giving HFAs the 

ability to extend the maximum 

amortization period to 40 years for loans 

that will have a shorter term. This 

commenter also suggested the rule 

clarify HUD’s flexibility to extend the 

mortgage insurance at the time a term 

loan balloon payment is due provided 

the HFA is willing to extend the loan 

term. 

HUD Response: HUD agreed with the 

comment and the language was changed 

accordingly. 

Comment: Provide specificity 

regarding HUD’s authority to adjust the 

amount of mortgage insurance. 

Commenters said that the current 

§ 266.417 allows HUD to modify the 

insured loan amount up until final 

endorsement but does not specify the 

factors that HUD would consider in 

doing so. Commenters said this 

potential reduction is separate from 

HUD’s right to challenge the cost 

certification under § 266.310(d)(4) and 

to deny endorsement based on a finding 

of fraud or misrepresentation under 

§ 266.300(e). The uncertainty regarding 

how HUD might exercise its discretion 

to adjust the amount of insurance under 

§ 266.417 can be problematic for Low 

Income Tax Credit equity investors and 

developers. As a result, commenters 

said it would be helpful if the rule could 

be revised to limit HUD’s discretion to 

reduce the insured loan amount to 

certain specific factors. 

HUD Response: HUD reserves the 

right to mitigate the risks posed by 

delegation of underwriting, servicing, 

and processing of Risk Sharing loans to 

HFAs. By retaining final authority to 

adjust the insured mortgage amount up 

to and including the final endorsement, 

HUD is not suggesting that it will, as a 

matter of policy, routinely review all 

decisions about insured advances or 

cost certification. 

E. Claim Procedure 

Comment: Permit more time for HFAs 

to use initial claim payments to retire 

bonds. A commenter said that the 

proposed § 266.628(a)(3) requires that 

an HFA use the initial claim payment’s 

proceeds to retire bonds within 30 days 

of the claim payment, but this may not 

be realistic in many instances and 

cannot always be accomplished under 

the controlling bond documents. 

Commenter suggested that the proposed 

rule require redemption as soon as 

reasonably permitted by the bond 

resolution or indenture, and that the 

claim payment be returned if not used 

to call bonds within 60 days instead of 

30 days. 

HUD Response: The 30-day 

requirement is in the existing 

regulations and the only change made in 

this rule is to clarify that 30 days means 

30 calendar days. HUD did not believe 

that this requirement was problematic 

for HFAs when the existing regulations 

were issued, and HUD will not change 

the requirement at this time. 

Comment: Revise the current 

regulation’s termination of insurance 

effective date provisions. Commenters 

said that the current § 266.622 does not 

contemplate a refinancing that involves 

the payoff or cancellation of an existing 

Risk Sharing loan with the proceeds 

from a new Risk-Sharing (or other FHAinsured) loan. Additionally, 

commenters said the Form 9807 

instructions, which state that voluntary 

insurance terminations are effective on 

the date that all requirements are met, 

seems inconsistent with § 266.620, 

which refers to a termination being 

effective at the end of the month when 

the requirements are met. Commenters 

suggested that § 266.622 provide that 

‘‘The termination shall be the last day 

of the month in which one of the events 

specified in § 266.620 occurs except in 

the case of a prepayment termination 

under § 266.620(a) or voluntary 

termination under § 266.620(d), which 

shall be effective at the time or upon the 

conditions requested by the HFA in the 

request to terminate, provided that in 

the event such prepayment termination 

or voluntary termination is in 

coordination with the issuance of RiskSharing (or other FHA) insurance on 

new financing for the subject project, 

the prepayment termination or 

voluntary termination shall in no event 

be effective later than the date of the 

initial disbursement of funds under 

such new insured loan.’’ 

HUD Response: Section 266.620(d) 

states if ‘‘[t]he HFA notifies the 

Commissioner of Termination of 

Insurance (voluntary termination);’’ 

then § 266.622 specifies ‘‘[t]he 

termination shall be the last day of the 

month in which one of the events 

specified in § 266.620 occurs.’’ 

Voluntary termination, by submitting 

HUD Form 9807, must be completed 

before the initial endorsement of a new 

refinancing loan can proceed. Therefore, 

it is vital that the Form 9807 is 

submitted in a timely manner to ensure 

that the existing project is terminated in 

HUD’s systems before the new project 

can be added. HUD agrees that the 

requirements of the Form 9807 are 

inconsistent with regulations in 

§ 266.622. Form 9807 was primarily 

designed for mortgage terminations 

insured under the National Housing Act 

and does not include any instructions 

on Risk Sharing terminations. HUD will 

explore revising the Form 9807 to 

include instructions for terminating 

Risk Sharing loans. However, HFAs are 

instructed that when submitting 

terminations, Block #5 of the Form 9807 

should indicate the ‘‘official’’ 


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termination date (the last day of the 

month). 

F. Endorsement and Approval 

Comment: No requirement that large 

loans require the FHA Commissioner’s 

approval. A commenter said that calling 

for the FHA Commissioner to review a 

‘‘large loan’’ under Risk Sharing is not 

necessary and could delay the loan 

process. 

HUD Response: As explained in the 

rule, FHA currently requires a National 

Loan Committee to approve all large 

loans under the MAP Guide for risk 

management purposes. Risk-sharing 

loans where the HFA assumes less than 

50 percent of the risk of loss pose a 

similar risk to FHA as do MAP loans 

that are fully insured. The National 

Loan Committee large loans review 

requirement does not impact the time it 

takes to process loans. Loans are usually 

reviewed and completed within 1–2 

days. Furthermore, this ensures that the 

FHA insurance fund is protected from 

potential losses on large loans. 

Therefore, this final rule maintains the 

revision that amends § 266.305(a) that 

establishes the underwriting standards 

for HFAs accepting less than 50 percent 

of the risk, to add a provision that large 

loans processed by these HFAs under 

Risk Sharing also requires the FHA 

Commissioner’s prior approval. 

Comment: Provide that HUD may 

accept an indemnification from the HFA 

in lieu of refusing to endorse a mortgage 

note for insurance at final endorsement 

due to fraud or material 

misrepresentation. Commenters stated 

that they approve of the rule’s new 

provision in § 266.620(b) that allows 

HUD, in its discretion, to accept an 

indemnification from the HFA to avoid 

insurance cancellation for fraud or 

misrepresentation. Commenters asked 

that the rule be clarified or extended to 

specify that, for substantial 

rehabilitation or new construction, HUD 

also has the discretion to accept an 

indemnification from the HFA in lieu of 

refusing to endorse the mortgage note at 

final endorsement due to fraud or 

material misrepresentation under 

§ 266.300(e). Commenters further said 

that conceptually, the issue is the same, 

and they believe that HUD would be 

covered by the indemnification. 

HUD Response: The new provision in 

§ 266.620(b) is designed to provide 

flexibility for HUD to accept 

indemnification from an HFA in lieu of 

terminating an existing contract of 

insurance for the reasons stated in the 

provision and applies to all Risk 

Sharing transactions, including for new 

construction and substantial 

rehabilitation. For clarification 

purposes, HUD will specify that all Risk 

Sharing transactions would be subject to 

this rule. Note that § 266.620 governs 

only the potential termination of 

mortgage insurance for the reasons 

stated in the provision but does not 

contain any provisions governing the 

Final Endorsement of loans for mortgage 

insurance. This provision gives HUD the 

flexibility to accept an indemnification 

from an HFA based on the 

circumstances of a transaction, but does 

not necessarily require that HUD do so. 

G. Non-Regulatory Actions 

Comment: Update the Firm Approval 

and the Closing Docket submission 

process. A commenter asked if HUD 

considered updates to the submission 

process for both Firm Approval and the 

Closing Docket to remove obsolete 

references such as utilizing a diskette, as 

well as an amortization schedule for 

loans ‘‘Insured of Advances’’ when 

being submitted for the initial 

endorsement. The commenter said that 

the current practice is to submit an 

electronic package as well as a hard 

copy to the local office for review. The 

commenter said the amortization 

schedule is useful when the note is 

modified as part of the final 

endorsement but not during the 

construction period, when loan 

payment is interest only. 

HUD Response: HUD agreed with the 

commenter and will eliminate all 

obsolete references when the HFA Risk 

Sharing Handbook 4590.1 is revised. 

The amortization schedule at initial and 

final endorsement submission is used 

by the Department’s Office of Financial 

Analysis and Controls Division and the 

Office of Insurance Operations to record 

the Department’s collections, 

receivables, and payables. 

Comment: Consider creating an 

Applicability Matrix for Risk-Sharing 

Loans. A commenter said an 

‘‘Applicability Matrix’’ is currently used 

for transactions financed under the 

MAP LIHTC Pilot program and having 

a similar matrix for Risk Sharing loans 

will ensure consistency among HFAs as 

part of underwriting and loan closing 

due diligence involving LIHTC 

properties. 

HUD Response: HFA Risk Sharing 

lenders are granted the maximum range 

of processing responsibilities and 

flexibilities. Program regulations 

provide for primary decision-making by 

participating HFAs in selecting projects 

to finance. An Applicability Matrix 

would be inconsistent with the 

program’s basic principles, which is 

delegating the underwriting, including 

loans’ terms and conditions, to the HFA. 

IV. Findings and Certifications 

Regulatory Review—Executive Orders 

12866 and 13563 

Under Executive Order 12866 

(Regulatory Planning and Review), a 

determination must be made whether a 

regulatory action is significant and 

therefore, subject to review by the Office 

of Management and Budget (OMB) in 

accordance with the order’s 

requirements. Executive Order 13563 

(Improving Regulations and Regulatory 

Review) directs executive agencies to 

analyze regulations that are ‘‘outmoded, 

ineffective, insufficient, or excessively 

burdensome, and to modify, streamline, 

expand, or repeal them in accordance 

with what has been learned.’’ 

This final rule updates HUD’s 

regulations pertaining to Housing 

Finance Agency Risk Sharing Program 

for Insured Affordable Multifamily 

Project Loans, codified in 24 CFR part 

266. The program regulations were 

initially promulgated in 1994, with the 

last updates undertaken in 2000, but 

only to a few regulatory sections. This 

update is undertaken to reflect statutory 

changes and revise outdated references 

and older terminology. The rule also 

better aligns HUD’s regulations with 

current industry and current HUD 

practices and policies. These changes 

would not create additional significant 

burdens for the public. As a result, this 

rule was determined not to be a 

significant regulatory action under 

section 3(f) of Executive Order 12866, 

Regulatory Planning and Review, and 

therefore was not reviewed by the Office 

of Management and Budget. 

Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

(5 U.S.C. 601 et seq.), generally requires 

an agency to conduct a regulatory 

flexibility analysis of any rule subject to 

notice and comment rulemaking 

requirements unless the agency certifies 

that the rule will not have a significant 

economic impact on a substantial 

number of small entities. 

The regulatory amendments would 

update the regulations governing HUD’s 

HFA Risk-Sharing program to conform 

to current industry practices and FHA 

policies with which HFAs and other 

program participants are already 

familiar. Other regulatory changes will 

provide greater flexibility for HFAs, 

alleviating administrative burdens and 

related program operating costs. While 

there may be some costs for HFAs to 

update their practices and procedures to 

reflect some of the regulatory changes, 

these costs are minimal in comparison 

to the streamlining benefits provided by 

the revised program regulations. 


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83440 Federal Register / Vol. 85, No. 246 / Tuesday, December 22, 2020 / Rules and Regulations 

For the reasons presented, the 

undersigned certifies that this rule will 

not have a significant economic impact 

on a substantial number of small 

entities. 

Executive Order 13132, Federalism 

Executive Order 13132 (entitled 

‘‘Federalism’’) prohibits an agency from 

publishing any rule that has Federalism 

implications if the rule either imposes 

substantial direct compliance costs on 

state and local governments and is not 

required by statute, or the rule preempts 

state law, unless the agency meets the 

consultation and funding requirements 

of section 6 of the Executive Order. This 

rule would not have Federalism 

implications and would not impose 

substantial direct compliance costs on 

state and local governments or preempt 

state law within the meaning of the 

Executive Order. 

Environmental Impact 

A Finding of No Significant Impact 

with respect to the environment was 

made prior to publication of the 

proposed rule in accordance with HUD 

regulations at 24 CFR part 50, which 

implement section 102(2)(C) of the 

National Environmental Policy Act of 

1969 (42 U.S.C. 4332(2)(C)). The 

Finding of No Significant Impact 

remains applicable and is available for 

public inspection during regular 

business hours in the Regulations 

Division, Office of General Counsel, 

Department of Housing and Urban 

Development, 451 Seventh Street SW, 

Room 10276, Washington, DC 20410– 

0500. Due to security measures at the 

HUD Headquarters building, please 

schedule an appointment to review the 

Finding by calling the Regulations 

Division at (202) 402–3055 (this is not 

a toll-free number). Individuals with 

speech or hearing impairments may 

access this number via TTY by calling 

the Federal Relay Service at (800) 877– 

8339. 

Unfunded Mandates Reform Act 

Title II of the Unfunded Mandates 

Reform Act of 1995 (Pub. L. 104–4; 

approved March 22, 1995) (UMRA) 

establishes requirements for Federal 

agencies to assess the effects of their 

regulatory actions on state, local, and 

tribal governments, and on the private 

sector. This proposed rule does not 

impose any Federal mandates on any 

state, local, or tribal government, or on 

the private sector, within UMRA’s 

meaning. 

Information Collection Requirements 

The information collection 

requirements contained in this rule have 

been approved by the Office of 

Management and Budget (OMB) under 

the Paperwork Reduction Act of 1995 

(44 U.S.C. 3501–3520) and assigned 

OMB control number 2502–0500. In 

accordance with the Paperwork 

Reduction Act of 1995, 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 currently valid OMB control 

number. 

Catalog of Federal Domestic Assistance 

The Catalog of Federal Domestic 

Assistance (CFDA) Program number for 

the Housing Finance Agencies Section 

542(c) Risk Sharing Program is 14.188. 

List of Subjects in 24 CFR Part 266 

Intergovernmental relations, Low and 

moderate income housing, Mortgage 

insurance, Reporting and recordkeeping 

requirements. 

Accordingly, for the reasons stated 

above, HUD amends 24 CFR part 266 as 

follows: 

PART 266—HOUSING FINANCE 

AGENCY RISK-SHARING PROGRAM 

FOR INSURED AFFORDABLE 

MULTIFAMILY PROJECT LOANS 

■ 1. The authority citation for part 266 

is revised to read as follows: 

Authority: 12 U.S.C. 1715z–22.; 42 U.S.C. 

3535(d). 

■ 2. Amend part 266 by removing the 

words ‘‘Contract of Insurance’’ and add 

in their place the words ‘‘contract of 

insurance’’ wherever they occur. 

■ 3. Revise § 266.1 to read as follows: 

§ 266.1 Purpose and scope. 

(a) Authority and scope. (1) Section 

542 of the Housing and Community 

Development Act of 1992 (12 U.S.C. 

1715z–22), directs the Secretary of the 

Department of Housing and Urban 

Development (HUD), acting through the 

Federal Housing Administration (FHA), 

to carry out programs that will provide 

new forms of Federal credit 

enhancement for multifamily loans. 

Section 542, entitled, ‘‘Multifamily 

Mortgage Credit Programs,’’ provides 

insurance authority independent from 

that provided by the National Housing 

Act. 

(2) Section 542(c) of the Housing and 

Community Development Act of 1992 

specifically directs HUD to carry out a 

program of risk-sharing with qualified 

State and local housing finance agencies 

(HFAs). The qualified HFAs are 

authorized to underwrite and process 

loans. HUD provides full mortgage 

insurance on affordable multifamily 

housing projects processed by such 

HFAs under this program. Through risksharing agreements with HUD, HFAs 

contract to reimburse HUD for a portion 

of the loss from any defaults that occur 

while HUD insurance is in force. 

(3) The extent to which HUD directs 

qualified HFAs regarding their 

underwriting standards, loan terms and 

conditions, and asset management and 

servicing procedures is related to the 

proportion of the risk taken by an HFA. 

(b) Purpose. The primary purpose of 

this program is to provide credit 

enhancement for multifamily loans, i.e., 

utilization of full insurance by HUD, 

pursuant to risk-sharing agreements 

with qualified housing finance agencies, 

for the development of affordable 

housing. The utilization of Federal 

credit enhancements increases access to 

capital markets and, thereby, increases 

the supply of affordable multifamily 

housing. By permitting HFAs to 

underwrite, process, and service loans 

and to manage and dispose of properties 

that fall into default, affordable housing 

is made available to eligible families 

and individuals in a timely manner. 

■ 4. Amend § 266.5 by: 

■ a. Removing ‘‘, as amended’’ from the 

definition of ‘‘Act’’; 

■ b. Revising the definition of 

‘‘Affordable housing’’; 

■ c. Removing from the definition of 

‘‘Commissioner’’ the words ‘‘his or her’’ 

and adding in their place the words ‘‘the 

Commissioner’s’’; 

■ d. Revising the definition of ‘‘Credit 

subsidy’’; 

■ e. Removing from the definition of 

‘‘Designated offices’’ the words ‘‘HUD 

Field Offices’’ and adding in their place 

the words ‘‘local HUD offices’’; 

■ f. Removing the definition of ‘‘Gross 

rent’’; 

■ g. Removing from the definition of 

‘‘Multifamily housing’’ the word 

‘‘Secretary’’ and add in its place the 

word ‘‘Commissioner’’; and 

■ h. Removing the definition of 

‘‘Supportive services’’. 

The revisions read as follows: 

§ 266.5 Definitions. 

* * * * * 

Affordable housing means a project 

that meets the requirements for a 

qualified low-income housing project 

under section 42(g) of the Internal 

Revenue Code of 1986 (26 U.S.C. 42(g)). 

For purposes of this part, the reference 

to a utility allowance in 26 U.S.C. 42(g) 

includes charges for the occupancy of a 

cooperative unit. 

* * * * * 

Credit subsidy means the cost of a 

direct loan or loan guarantee under the 


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Federal Credit Reform Act of 1990 

(subtitle B of title XIII of the Omnibus 

Budget Reconciliation Act of 1990, 

Public Law 101–508, approved Nov. 5, 

1990). 

* * * * * 

§ 266.10 [Removed] 

■ 5. Remove § 266.10. 

■ 6. Revise § 266.30 to read as follows: 

§ 266.30 Nonapplicability of 24 CFR part 

246. 

The regulations at 24 CFR part 246, 

pertaining to local rent control, do not 

apply to projects that are security for 

mortgages insured under this part. 

■ 7. Amend § 266.100 by: 

■ a. Revising the first sentence of 

paragraph (a) introductory text; 

■ b. Revising paragraphs (a)(1), (a)(6)(i), 

(b)(1), (b)(2) introductory text, and 

(b)(3); and 

■ c. Adding paragraph (b)(4). 

The revisions and addition read as 

follows: 

§ 266.100 Qualified housing finance 

agency (HFA). 

(a) Qualifications. To participate in 

the program, an HFA must apply and be 

specifically approved for the program 

described in this part, in addition to 

being approved as a mortgagee under 

§ 202.10 of this part. * * * 

(1) Carry an issuer credit rating of ‘‘A’’ 

or better, or an equivalent as evaluated 

by Standard and Poor’s or any other 

nationally recognized rating agency; or 

* * * * * 

(6) * * * 

(i) The Department of Justice has not 

brought a civil rights suit against the 

HFA, and no suit is pending; 

* * * * * 

(b) * * * 

(1) Level I approval to originate, 

service, and dispose of multifamily 

mortgages where the HFA uses its own 

underwriting standards, loan terms and 

conditions, and asset management and 

servicing procedures, and assumes 50 to 

90 percent of the risk of loss (in 10 

percent increments). 

(2) Level II approval to originate, 

service, and dispose of multifamily 

mortgages where the HFA uses 

underwriting standards, loan terms and 

conditions, and asset management and 

servicing procedures approved by HUD, 

and: 

* * * * * 

(3) For HFAs who plan to use Level 

I and Level II processing, the 

underwriting standards, loan terms and 

conditions, and asset management and 

servicing procedures to be used on 

Level II loans must be approved by 

HUD. 

(4) Every five years, HUD will review 

the underwriting standards, loan terms 

and conditions, and asset management 

and servicing procedures for HFAs with 

Level II approval. HUD may require 

changes to these procedures as a 

condition for continued Level II 

approval. 

■ 8. Amend § 266.105 by revising 

paragraph (b) to read as follows: 

§ 266.105 Application requirements. 

* * * * * 

(b) Applications for participation in 

program. Applications from HFAs for 

approval to participate in the program 

under this part may be submitted at any 

time, and must be submitted in the form 

and manner established by HUD. 

■ 9. Amend § 266.110 by revising the 

paragraph (a) subject heading, the first 

sentence of paragraph (a), and the third 

sentence of paragraph (b)(1) 

introductory text to read as follows: 

§ 266.110 Reserve requirements. 

(a) HFAs with an issuer credit rating 

of ‘‘A’’ or better or overall rating of ‘‘A’’ 

or better on general obligation bonds. 

An HFA with an issuer credit rating of 

‘‘A’’ or better, or an equivalent 

designation, or an HFA with an overall 

rating of ‘‘A’’ or better on its general 

obligation bonds, is not required to have 

additional reserves so long as the HFA 

maintains that designation or rating, 

unless the Commissioner determines 

that a prescribed level of reserves is 

necessary. * * * 

(b) * * * 

(1) * * * The account must be 

established prior to the execution of any 

risk-sharing agreement under this part 

in an initial amount of not less than 

$500,000. * * * 

* * * * * 

§ 266.115 [Amended] 

■ 10. Amend § 266.115 by removing the 

words ‘‘his or her’’ from the first 

sentence in paragraph (a) and from 

paragraph (c). 

■ 11. Amend § 266.120 by revising 

paragraphs (d) and (e)(5) to read as 

follows: 

§ 266.120 Actions for which sanctions may 

be imposed. 

* * * * * 

(d) Actions or conduct for which 

sanctions may be imposed against the 

HFA by HUD’s Mortgagee Review Board 

under 24 CFR 25.9, which pertains to 

‘‘notice of administrative action’’. 

(e) * * * 

(5) Maintain an issuer credit rating of 

‘‘A’’ or better, or an equivalent 

designation, or overall rating of ‘‘A’’ on 

general obligation bonds (or if such 

rating is lost, comply with paragraph 

(e)(6) of this section); 

* * * * * 

■ 12. Amend § 266.125 by revising 

paragraph (a)(6), adding paragraph 

(a)(8), and revising the first sentence of 

paragraph (d)(1) to read as follows: 

§ 266.125 Scope and nature of sanctions. 

(a) * * * 

(6) Recommend to the Commissioner 

that the HFA’s mortgagee approval be 

withdrawn pursuant to 24 CFR part 25 

(regulations of the Mortgagee Review 

Board) and/or that penalties be imposed 

pursuant to 24 CFR part 30 (regulations 

pertaining to Civil Money Penalties; 

Certain Prohibited Contact); 

* * * * * 

(8) Require the HFA to revise any or 

all of its underwriting, processing, asset 

management, or servicing policies and 

procedures as directed by the 

Commissioner. 

* * * * * 

(d) * * * 

(1) Any sanction imposed by a 

designated office in writing will be 

immediately effective, will state the 

grounds for the action, and provide for 

the HFA’s right to an informal hearing 

before the designated office 

representative or designee in the 

designated office. * * * 

* * * * * 

■ 13. Amend § 266.200 by: 

■ a. Revising paragraphs (b)(2), (c), (d), 

(e), and (g); 

■ b. Redesignating paragraph (h) as 

paragraph (i); and 

■ c. Adding new paragraph (h). 

The revisions and addition read as 

follows: 

§ 266.200 Eligible projects. 

* * * * * 

(b) * * * 

(2) Substantial rehabilitation occurs 

when the scope of work to improve an 

existing project exceeds in aggregate 

cost a sum equal to the base per 

dwelling unit limit times the applicable 

high cost factor established by the 

Commissioner, or when the scope of 

work involves the replacement of two or 

more building systems. Replacement is 

when the cost of replacement work 

exceeds 50% of the cost of replacing the 

entire system. The base per dwelling 

unit limit is $15,933 for 2019, and will 

be adjusted annually based on the 

percentage change in the consumer 

price index. 

(c) Existing projects. Financing of 

existing properties for acquisition or 

refinancing without substantial 

rehabilitation is allowed. 

(1) If the financing will result in the 

preservation of affordable housing, 


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83442 Federal Register / Vol. 85, No. 246 / Tuesday, December 22, 2020 / Rules and Regulations 

where the property will be maintained 

as affordable housing for a period of at 

least 20 years, regardless of whether the 

loan is prepaid; and 

(2) Project occupancy is not less than 

93 percent (to include consideration of 

rent in arrears), based on the average 

occupancy in the project over the most 

recent 12 months; and 

(3) The loan to be refinanced has not 

been in default within the 12 months 

prior to the date of the application for 

refinancing; and 

(4) A capital needs assessment is 

performed, and funds escrowed for all 

necessary repairs and replacement 

reserves funded for future capital 

repairs; and 

(5) If the project is subject to a 

Housing Assistance Payment (HAP) 

contract, and is not a project financed 

under section 202 of the Housing Act of 

1959 (12 U.S.C. 1701q) by a Level I 

participant, then: 

(i) The owner of the property agrees 

to renew the HAP contract for a 20-year 

term; 

(ii) Existing and post-refinance HAP 

residual receipts are set aside to be used 

to reduce future HAP payments; and 

(iii) The HUD-insured mortgage does 

not exceed an amount supportable by 

the lower of the unit rents being 

collected under the rental assistance 

agreement or the unit rents being 

collected at unassisted projects in the 

market area that are similar in amenities 

and location to the project for which 

insurance is being requested; and 

(6) For Level II participants only, the 

HUD-insured mortgage may not exceed 

the sum of the existing indebtedness, 

cost of refinancing, or acquisition, the 

cost of repairs and reasonable 

transaction costs as determined by the 

Commissioner. (This paragraph does not 

apply to Level I participants.) 

(d) Projects receiving section 8 rental 

subsidies or other rental subsidies. 

Projects receiving project-based housing 

assistance payments under section 8 of 

the U.S. Housing Act of 1937 (42 

U.S.C.1437f) or other rental subsidies 

and meeting the requirements of this 

part may be insured under this part only 

if the mortgage does not exceed an 

amount supportable by the lower of the 

unit rents being or to be collected under 

the rental assistance agreement or the 

unit rents being collected at unassisted 

projects in the market that are similar in 

amenities and location to the project for 

which insurance is being requested. 

This paragraph does not apply to 

projects of Level I participants if those 

projects are financed under section 202 

of the Housing Act of 1959 (12 U.S.C. 

1701q). 

(e) SRO projects. Single room 

occupancy (SRO) projects, as defined in 

§ 266.5, are eligible for insurance under 

this part. Units in SRO projects must be 

subject to 30-calendar day or longer 

leases; however, rent payments may be 

made on a weekly basis in SRO projects. 

* * * * * 

(g) Elderly projects. Projects or parts 

of projects specifically designed for the 

use and occupancy by elderly families. 

An elderly family means any household 

where the head or spouse is 62 years of 

age or older, including children under 

18, and also any single person who is 62 

years of age or older. 

(h) Housing for older persons. Projects 

eligible for and in compliance with 42 

U.S.C. 3607(b) and 24 CFR part 100, 

subpart E. 

* * * * * 

§ 266.205 [Amended] 

■ 14. Amend § 266.205 in paragraph 

(a)(1) by adding the word ‘‘calendar’’ 

after the number ‘‘30’’ and in paragraph 

(b)(2) by adding the letters ‘‘U.S.’’ before 

the term ‘‘Department of Defense’’. 

■ 15. Amend § 266.210 by: 

■ a. Removing paragraph (b); 

■ b. Redesignating paragraphs (c), (d) 

and (e) as paragraphs (b), (c) and (d), 

respectively; and 

■ c. Revising newly redesignated 

paragraphs (c) and (d). 

The revisions read as follows: 

§ 266.210 HUD-retained review functions. 

* * * * * 

(c) Subsidy layering. The 

Commissioner, or Housing Credit 

Agencies as defined by section 42 of the 

Internal Revenue Code of 1986 (26 

U.S.C. 42), through such delegation as 

may be in effect by regulation hereafter, 

shall review all projects receiving tax 

credits and some form of HUD 

assistance for any excess subsidy 

provided to individual projects and 

reduce subsidy sources in accordance 

with outstanding guidelines. 

(d) Davis-Bacon Act. The 

Commissioner shall obtain and provide 

to the HFA the appropriate U.S. 

Department of Labor wage rate 

determinations under the Davis-Bacon 

Act, where they apply under this part. 

■ 16. Amend § 266.215 by revising 

paragraph (e) to read as follows: 

§ 266.215 Functions delegated by HUD to 

HFAs. 

* * * * * 

(e) Lead-based paint. The HFA will 

perform functions related to Lead-based 

paint requirements as set forth in 24 

CFR part 35, subparts A, B, G, and R. 

■ 17. Add § 266.217 to read as follows: 

§ 266.217 Environmental review 

requirements. 

The responsible entity, as defined in 

24 CFR part 58 (Environmental Review 

Procedures for Entities Assuming HUD 

Environmental Responsibilities), 

assumes legal responsibility for 

compliance with the requirements of the 

National Environmental Policy Act of 

1969 and related laws and authorities. 

The responsible entity will visit each 

project site proposed for insurance 

under this part and prepare the 

applicable environmental reviews as set 

forth in 24 CFR part 58. HUD may make 

a finding in accordance with 24 CFR 

58.11, Legal Capacity and Performance, 

and may perform the environmental 

review itself under 24 CFR part 50 

(Protection and Enhancement of 

Environmental Quality). In all cases the 

environmental review must be 

completed before HUD may issue the 

firm approval letter. 

■ 18. Revise § 266.220 to read as 

follows: 

§ 266.220 Nondiscrimination in housing 

and employment. 

The mortgagor must certify to the 

HFA that, so long as the mortgage is 

insured under this part, the mortgagor 

will: 

(a) Not use tenant selection 

procedures that discriminate against 

families with children, except in the 

case of a project qualifying for and 

complying with the requirements of the 

‘‘housing for older persons’’ exemption, 

as defined in section 807(b)(2) of the 

Fair Housing Act (42 U.S.C. 3607(b)) 

and further described in 24 CFR part 

100, subpart E. Projects receiving 

Federal financial assistance in which 

elderly families include minor children 

may not avail themselves of the housing 

for older persons exemption; 

(b) Determine eligibility for admission 

and continued occupancy without 

regard to actual or perceived sexual 

orientation, gender identity, or marital 

status and refrain from inquiries about 

sexual orientation and gender identity 

in accordance with 24 CFR 5.105(a)(2); 

(c)(1) Comply with: 

(i) The Fair Housing Act (42 U.S.C. 

3601 through 3619), as implemented by 

24 CFR part 100; 

(ii) Titles II and III of the Americans 

with Disabilities Act of 1990 (42 U.S.C. 

12101 through 12213), as implemented 

by 28 CFR part 35; 

(iii) Section 3 of the Housing and 

Urban Development Act of 1968 (12 

U.S.C. 1701u), as implemented by 24 

CFR part 135; 

(iv) The Equal Credit Opportunity Act 

(15 U.S.C. 1691–1691f), as implemented 

by 12 CFR part 202; 


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(v) Executive Order 11063, as 

amended by Executive Order 12259 (3 

CFR 1958–1963 Comp., p. 652 and 3 

CFR 1980 Comp., p. 307), and 

implemented by 24 CFR part 107; 

(vi) Executive Order 11246 (3 CFR 

1964–1965 Comp., p. 339), as 

implemented by 41 CFR part 60; and 

(vii) Other applicable Federal laws 

and regulations issued pursuant to these 

authorities; and applicable State and 

local fair housing and equal opportunity 

laws. 

(2) In addition to the authorities listed 

in paragraph (c)(1) of this section, a 

mortgagor that receives Federal 

financial assistance must also certify to 

the HFA that, so long as the mortgage 

is insured under this part, it will 

comply with: 

(i) Title VI of the Civil Rights Act of 

1964 (42 U.S.C. 2000d), as implemented 

by 24 CFR part 1; 

(ii) The Age Discrimination Act of 

1975 (42 U.S.C. 6101 through 6107), as 

implemented by 24 CFR part 146; and 

(iii) Section 504 of the Rehabilitation 

Act of 1973 (29 U.S.C. 794), as 

implemented by 24 CFR part 8. 

■ 19. Amend § 266.225 by revising 

paragraphs (a)(1) introductory text, 

(a)(1)(i), (b), (c), (d)(1), and the second 

sentence of paragraph (e) to read as 

follows: 

§ 266.225 Labor standards. 

(a) * * * 

(1) All laborers and mechanics 

employed by contractors or 

subcontractors on a project insured 

under this part shall be paid not less 

than the wages prevailing in the locality 

in which the work was performed for 

the corresponding classes of laborers 

and mechanics employed in 

construction of a similar character, as 

determined by the Secretary of the U.S. 

Department of Labor (Secretary of 

Labor) in accordance with the DavisBacon Act, as amended (40 U.S.C. 3141 

et seq.), where the project meets all of 

the following conditions: 

(i) Advances for construction of the 

project are insured under this part; 

* * * * * 

(b) Volunteers. The provisions of this 

section shall not apply to volunteers 

under the conditions set out in 24 CFR 

part 70 (Use of Volunteers on Projects 

Subject to Davis-Bacon and HUDDetermined Wage Rates). In applying 24 

CFR part 70, insurance under this part 

shall be treated as a program for which 

there is a statutory exemption for 

volunteers. 

(c) Labor standards. Any contract, 

subcontract, or building loan agreement 

executed for a project subject to DavisBacon wage rates under paragraph (a) of 

this section shall comply with all labor 

standards and provisions of the U.S. 

Department of Labor regulations in 29 

CFR parts 1, 3, and 5 that would be 

applicable to a mortgage insurance 

program to which Davis-Bacon wage 

rates are made applicable by statute, 

provided, that regulatory provisions 

relating to investigations and 

enforcement by the U.S. Department of 

Labor shall not be applicable, and 

enforcement of Davis-Bacon labor 

standards shall be the responsibility of 

the Commissioner in accordance with 

paragraph (e) of this section. 

(d) * * * 

(1) No advance under a mortgage on 

a project subject to Davis-Bacon wage 

rates under paragraph (a) of this section 

shall be eligible for insurance under this 

part unless the HFA determines (in 

accordance with the Commissioner’s 

administrative procedures) that the 

general contractor or any subcontractor 

or any firm, corporation, partnership or 

association in which the contractor or 

subcontractor has a substantial interest 

was not, on the date the contract or 

subcontract was executed, on the 

ineligible list established by the 

Comptroller General of the United 

States, pursuant to 29 CFR 5.12, issued 

by the Secretary of Labor. 

* * * * * 

(e) * * * Where routine 

administration and enforcement 

functions are delegated to the HFA, the 

HFA shall bear financial responsibility 

for any deficiency in payment of 

prevailing wages or, where applicable 

under 29 CFR part 1 (Procedures for 

Predetermination of Wage Rates), any 

increase in compensation to a 

contractor, that is attributable to any 

failure properly to carry out its 

delegated functions. * * * 

■ 20. Amend § 266.300 by: 

■ a. Revising paragraph (b)(1); 

■ b. Redesignating paragraphs (b)(3), (4), 

and (5) as paragraphs (b)(4), (5), and (6), 

respectively; 

■ c. Adding new paragraph (b)(3); 

■ d. Revising newly redesignated 

paragraph (b)(5); and 

■ e. Revising paragraph (c). 

The revisions and addition read as 

follows: 

§ 266.300 HFAs accepting 50 percent or 

more of risk. 

* * * * * 

(b) * * * 

(1) Determine that a market for the 

project exists, taking into consideration 

any comments from the local HUD 

office relative to the potential adverse 

impact the project will have on existing 

or proposed Federally insured and 

assisted projects in the area. 

* * * * * 

(3) Arrange for the performance of an 

environmental review in accordance 

with § 266.217; 

* * * * * 

(5) Approve the Affirmative Fair 

Housing Marketing Plan, required by 

§ 266.215(a); and 

* * * * * 

(c) HUD-retained reviews. After 

positive completion of the HUDretained reviews specified in 

§ 266.210(a) and (b) the local HUD office 

will issue a firm approval letter. 

* * * * * 

■ 21. Amend § 266.305 by: 

■ a. Revising paragraphs (a) and (b)(1); 

■ b. Redesignating paragraphs (b)(3), (4), 

and (5) as paragraphs (b)(4), (5), and (6), 

respectively; 

■ c. Adding new paragraph (b)(3); 

■ d. Revising newly redesignated 

paragraph (b)(5), and 

■ e. Revising paragraph (c). 

The revisions and additions read as 

follows: 

§ 266.305 HFAs accepting less than 50 

percent of risk. 

(a) Underwriting standards. The 

underwriting standards and loan terms 

and conditions of any HFA electing to 

take less than 50 percent of the risk on 

certain projects are subject to review, 

modification, and approval by HUD in 

accordance with § 266.100(b). These 

HFAs may assume 25 percent or 10 

percent of the risk depending upon the 

loan-to-replacement-cost or loan-tovalue ratios of the projects to be insured 

as specified in § 266.100(b)(2)(i) and (ii). 

Large loans, as defined by HUD for its 

insured multifamily mortgage programs, 

require prior approval by the 

Commissioner. 

(b) * * * 

(1) Determine that a market for the 

project exists, taking into consideration 

any comments from the local HUD 

office relative to the potential adverse 

impact the project will have on existing 

or proposed Federally insured and 

assisted projects in the area; 

* * * * * 

(3) Arrange for the performance of an 

environmental review in accordance 

with § 266.217; 

* * * * * 

(5) Approve the Affirmative Fair 

Housing Marketing Plan, required by 

§ 266.215(a); and 

* * * * * 

(c) HUD-retained reviews. After 

positive completion of the HUDretained reviews specified in 


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83444 Federal Register / Vol. 85, No. 246 / Tuesday, December 22, 2020 / Rules and Regulations 

§ 266.210(a) and (b), the local HUD 

office will issue a firm approval letter. 

* * * * * 

■ 22. Amend § 266.410 by revising 

paragraph (e) to read as follows: 

§ 266.410 Mortgage provisions. 

* * * * * 

(e) Amortization. The mortgage must 

provide for complete amortization (i.e., 

be regularly amortizing) over the term of 

the mortgage. The complete 

amortization requirement does not 

apply to: 

(1) Construction loans, or 

(2) Level I participants where the loan 

has a minimum term of 17 years that 

would amortize over a maximum period 

of 40 years and the HFA’s underwriting 

standards, loan terms and conditions, 

and asset management and servicing 

procedures have been approved by 

HUD. 

* * * * * 

■ 23. Amend § 266.420 by revising the 

second sentence of paragraph (a) and 

paragraphs (b)(3), (4), and (7) and 

adding paragraph (b)(13) to read as 

follows: 

§ 266.420 Closing and endorsement by the 

Commissioner. 

(a) * * * The note must provide that 

the mortgage is insured under section 

542(c) of the Housing and Community 

Development Act of 1992 and the 

regulations set forth in this part that are 

in effect on the date of endorsement. 

* * * 

(b) * * * 

(3) Certification that the loan has been 

processed, prudently underwritten 

(including a determination that a market 

exists for the project), cost certified (if 

the project is being submitted for final 

endorsement) and closed in full 

compliance with the HFA’s standards 

and requirements (or where the 

mortgage is insured under Level II, in 

full compliance with the underwriting 

standards, loan terms and conditions, 

and asset management and servicing 

procedures, as approved by HUD). 

(4) At the time of final endorsement, 

for periodic advances cases, a 

certification that the advances were 

made in accordance with the mortgage 

pursuant to § 266.310. 

* * * * * 

(7) A certification that the HFA has 

reviewed and approved the Affirmative 

Fair Housing Marketing Plan, required 

by § 266.215(a), and found it acceptable. 

* * * * * 

(13) Certification that housing 

claiming the housing for older persons 

exemption is eligible for and complies 

with 42 U.S.C. 3607(b) and 24 CFR part 

100, subpart E. 

■ 24. Revise § 266.500 to read as 

follows: 

§ 266.500 General. 

(a) HFA responsibility for monitoring 

project owners. The HFA will have full 

responsibility for managing and 

servicing projects insured under this 

part (in accordance with procedures 

disclosed and submitted with its 

application and the requirements of this 

part). The HFA is responsible for 

monitoring and determining the 

compliance of the project owner in 

accordance with the provisions of this 

subpart. HUD will monitor the 

performance of the HFA, not the project 

owner, to determine its compliance with 

the provisions covered under this 

subpart. 

(b) HUD review of procedures for 

HFAs with Level II approval. Asset 

management and servicing procedures 

of any HFA electing to take less than 50 

percent of the risk on certain projects 

are subject to review, modification, and 

approval by HUD in accordance with 

§ 266.100(b). 

§ 266.505 [Amended] 

■ 25. Amend § 266.505: 

■ a. In paragraph (b)(8), after the word 

‘‘Plan’’ by adding the phrase ‘‘, required 

by § 266.215(a),’’; 

■ b. In paragraph (b)(10), by removing 

the words ‘‘General Accounting’’ and 

adding in their place ‘‘U.S. Government 

Accountability’’. 

■ 26. Revise § 266.507 to read as 

follows: 

§ 266.507 Maintenance requirements. 

The mortgagor must maintain the 

project in accordance with the physical 

condition standards in 24 CFR part 5, 

subpart G (Physical Condition 

Standards and Inspection 

Requirements). 

■ 27. Amend § 266.510 by revising 

paragraph (a) to read as follows: 

§ 266.510 HFA responsibilities. 

(a) Inspections. The HFA must 

perform inspections in accordance with 

the physical inspection procedures in 

24 CFR part 5, subpart G (Physical 

Condition Standards and Inspection 

Requirements). 

* * * * * 

■ 28. Revise § 266.600 to read as 

follows: 

§ 266.600 Mortgage insurance premium: 

Insurance upon completion. 

(a) Initial premium. For projects 

insured upon completion, on the date of 

the final closing, the HFA shall pay to 

the Commissioner an initial premium in 

an amount established by the 

Commissioner under § 266.604. 

(b) Premium payable with first 

payment of principal. On the date of the 

first payment of principal the HFA shall 

pay a second premium (calculated on a 

per annum basis) in an amount 

established by the Commissioner under 

§ 266.604. 

(c) Subsequent premiums. Until one 

of the conditions is met under 

§ 266.606(a), the HFA on each 

anniversary of the date of the first 

principal payment shall pay to the 

Commissioner an annual mortgage 

insurance premium in an amount 

established by the Commissioner under 

§ 266.604, without taking into account 

delinquent payments, or partial claim 

payment under § 266.630, or 

prepayments, for the year following the 

date on which the premium becomes 

payable. 

■ 29. Amend § 266.602 by revising 

paragraph (a), the first sentence of 

paragraph (b), the first sentence of 

paragraph (c), and paragraph (d) to read 

as follows: 

§ 266.602 Mortgage insurance premium: 

Insured advances. 

(a) Initial premium. For projects 

involving insured advances, on the date 

of the initial closing, the HFA shall pay 

to the Commissioner an initial premium 

equal to an amount established by the 

Commissioner under § 266.604. 

(b) Interim premium. On each 

anniversary of the initial closing, the 

HFA shall pay an interim mortgage 

insurance premium in an amount 

established by the Commissioner under 

§ 266.604. * * * 

(c) Premium payable with first 

payment of principal. On the date of the 

first principal payment, the HFA shall 

pay a mortgage insurance premium in 

an amount established by the 

Commissioner under § 266.604. * * * 

(d) Subsequent premiums. Until one 

of the conditions is met under 

§ 266.606(a), the HFA on each 

anniversary of the date of the first 

principal payment shall pay to the 

Commissioner an annual mortgage 

insurance premium in an amount 

established by the Commissioner under 

§ 266.604, without taking into account 

delinquent payments, prepayments, or a 

partial claim payment under § 266.630, 

for the year following the date on which 

the premium becomes payable. 

■ 30. Amend § 266.604 by revising 

paragraphs (a) and (b), the first sentence 

of paragraph (c), and the second and 

third sentences of paragraph (d) to read 

as follows: 


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Federal Register / Vol. 85, No. 246 / Tuesday, December 22, 2020 / Rules and Regulations 83445 

§ 266.604 Mortgage insurance premium: 

Other requirements. 

(a) Premium calculations on or after 

first principal payment. The premiums 

payable to the Commissioner on and 

after the first principal payment shall be 

calculated in accordance with the 

amortization schedule prepared by the 

HFA for final closing and an amount 

established by the Commissioner 

through a notice published in the 

Federal Register and providing a 30-day 

comment period. After the comments 

have been considered, HUD will publish 

a final notice announcing the premium 

and its effective date. The premium 

shall not take into account delinquent 

payments or prepayments. 

(b) Future premium changes. Notice 

of future premium changes will be 

published in the Federal Register. The 

Commissioner will propose mortgage 

insurance premium changes for the 

Risk-Sharing Program and provide a 30- 

calendar day public comment period for 

the purpose of accepting comments on 

whether the proposed changes are 

appropriate. After the comments have 

been considered, HUD will publish a 

final notice announcing the premium 

and its effective date. 

(c) Closing information. The HFA 

shall provide final closing information 

to the Commissioner within 15 calendar 

days of the final closing in a format 

prescribed by the Commissioner. * * * 

(d) Due date for premium payments. 

* * * Any premium received by the 

Commissioner more than 15 calendar 

days after the due date shall be assessed 

a late charge of 4 percent of the amount 

of the premium payment due. Mortgage 

insurance premiums that are paid to the 

Commissioner more than 30 calendar 

days after the due date shall begin to 

accrue interest at the rate prescribed by 

the Treasury Fiscal Requirements 

Manual. 

■ 31. Amend § 266.620 by: 

■ a. Revising the section heading; 

■ b. Redesignating the introductory text 

as paragraph (a) and redesignating 

paragraphs (a) through (g), as paragraphs 

(a)(1) through (7), respectively; and 

■ c. Adding new paragraph (b). 

The revision and addition read as 

follows: 

§ 266.620 Termination of contract of 

insurance and indemnification. 

* * * * * 

(b) In lieu of termination of the 

mortgage insurance contract pursuant to 

paragraph (a)(5) of this section, the 

Commissioner may, in his or her full 

discretion, permit a Level I participant 

rated ‘‘A’’ or higher to indemnify HUD, 

or otherwise reimburse HUD in a 

manner acceptable to the Commissioner, 

for the full amount of the mortgage 

claim. 

■ 32. Amend § 266.626 by revising the 

first sentence of paragraph (c) and 

revising paragraph (d) to read as 

follows: 

§ 266.626 Notice and date of termination 

by the Commissioner. 

* * * * * 

(c) Notice of default. If a default (as 

defined in paragraph (a) of this section) 

continues for a period of 30 calendar 

days, the HFA must notify the 

Commissioner within 10 calendar days 

thereafter, unless the default is cured 

within the 30-day period. * * * 

(d) Timing of claim filing. Unless a 

written extension is granted by HUD, 

the HFA must file an application for 

initial claim payment (or, if appropriate, 

for partial claim payment) within 75 

calendar days from the date of default 

and may do so as early as the first day 

of the month following the month for 

which a payment was missed. Upon 

request of the HFA, HUD may extend, 

up to 180 calendar days from the date 

of default, the deadline for filing a 

claim. In those cases where the HFA 

certifies that the project owner is in the 

process of transacting a bond refunder, 

refinancing the mortgage, or changing 

the ownership for the purpose of curing 

the default and bringing the mortgage 

current, HUD may extend the deadline 

for filing a claim beyond 180 calendar 

days, not to exceed 360 calendar days 

from the date of default. 

■ 33. Amend § 266.628 by revising 

paragraph (a)(3) to read as follows: 

§ 266.628 Initial claim payments. 

(a) * * * 

(3) The HFA must use the proceeds of 

the initial claim payment to retire any 

bonds or any other financing 

mechanisms securing the mortgage 

within 30 calendar days of the initial 

claim payment. Any excess funds 

resulting from such retirement or 

repayment shall be returned to HUD 

within 30 calendar days of the 

retirement. 

* * * * * 

■ 34. Amend § 266.630 by revising the 

second sentence of paragraph (c)(2), 

paragraphs (d)(1), (2), and (4), and the 

second sentence of paragraph (d)(5) to 

read as follows: 

§ 266.630 Partial payment of claims. 

* * * * * 

(c) * * * 

(2) * * * The HFA is granted an 

extension of 30 calendar days from the 

date of any notification for further 

action. 

(d) Requirements—(1) One partial 

claim payment. Only one partial claim 

payment may be made under a contract 

of insurance. 

(2) Partial claim payment amount. 

The amount of the partial claim 

payment is limited to 50% of the 

amount of relief provided by the HFA in 

the form of a reduction in principal and 

a reduction of delinquent interest due 

on the insured mortgage times the lesser 

of HUD’s percentage of the risk of loss 

or 50 percent. 

* * * * * 

(4) Partial claim repayment by HFA. 

The HFA must remit to HUD a 

percentage of all amounts collected on 

the HFA’s second mortgage within 15 

calendar days of receipt by the HFA. 

The applicable percentage is equal to 

the percentage used in paragraph (d)(2) 

of this section to determine the partial 

claim payment amount. Payments made 

after the 15th day must include a 5 

percent late charge plus accrued interest 

at the debenture rate. 

(5) * * * The HFA must submit a 

final certified statement within 30 

calendar days after the second mortgage 

is paid in full, foreclosed, or otherwise 

terminated. 

§ 266.634 [Amended] 

■ 35. Amend § 266.634 in paragraph (c) 

by adding the word ‘‘calendar’’ before 

the word ‘‘days’’ in the first sentence. 

§ 266.638 [Amended] 

■ 36. Amend § 266.638 by: 

■ a. Adding the word ‘‘calendar’’ before 

the word ‘‘days’’ in the first sentence of 

paragraph (a); 

■ b. Removing the word ‘‘five’’ from the 

second sentence of paragraph (b) and 

adding in its place the number ‘‘5’’; 

■ c. Removing the words ‘‘five year’’ 

from the third sentence of paragraph (b) 

and adding in their place ‘‘5-year’’. 

§ 266.642 [Amended] 

■ 37. Amend § 266.642 in the third 

sentence of by removing the phrase ‘‘45- 

day’’ and adding in its place the phrase 

‘‘45-calendar-day’’. 

§ 266.644 [Amended] 

■ 38. Amend § 266.644 in the 

introductory text by adding the word 

‘‘calendar’’ before the word ‘‘days’’. 

§ 266.648 [Amended] 

■ 39. Amend § 266.648 in paragraph 

(c)(4) by removing the words ‘‘the Office 

of General Counsel’’ and adding in their 

place ‘‘HUD’’. 

■ 40. Amend§ 266.650 by revising 

paragraph (a) to read as follows: 


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83446 Federal Register / Vol. 85, No. 246 / Tuesday, December 22, 2020 / Rules and Regulations 

§ 266.650 Items deducted from total loss. 

* * * * * 

(a) All amounts received by the HFA 

on account of the mortgage after the date 

of default, including any partial 

payment of claim paid by HUD in the 

event a full claim follows a partial 

payment of claim; 

* * * * * 

§ 266.654 [Amended] 

■ 41. Amend § 266.654 in paragraph (b) 

by adding the word ‘‘calendar’’ before 

the word ‘‘days’’ in the first sentence. 

Dana T. Wade, 

Assistant Secretary for Housing—Federal 

Housing Commissioner. 

[FR Doc. 2020–27914 Filed 12–21–20; 8:45 am] 

BILLING CODE 4210–67–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 301 

[TD 9940] 

RIN 1545–BP41 

Misdirected Direct Deposit Refunds 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations. 

SUMMARY: These final regulations 

provide the procedures under section 

6402(n) of the Internal Revenue Code 

(Code) for identification and recovery of 

a misdirected direct deposit refund. The 

final regulations reflect changes to the 

law made by the Taxpayer First Act. 

The final regulations affect taxpayers 

who have made a claim for refund, 

requested the refund be issued as a 

direct deposit, but did not receive a 

refund in the account designated on the 

claim for refund. 

DATES: 

Effective date: These regulations are 

effective on December 22, 2020. 

Applicability date: These regulations 

apply to reports to the IRS made after 

[date of publication] that a taxpayer 

never received a direct deposit refund. 

FOR FURTHER INFORMATION CONTACT: 

Mary C. King at (202) 317–5433 (not a 

toll-free number). 

SUPPLEMENTARY INFORMATION: 

Background 

This document contains amendments 

to 26 CFR part 301 under section 

6402(n) of the Code and provides 

guidance on the procedures used to 

identify and recover tax refunds issued 

by electronic funds transfer (direct 

deposit) that were not delivered to the 

account designated to receive the direct 

deposit refund on the federal tax return 

or other claim for refund. Section 

6402(n) was added to the Code by 

section 1407 of the Taxpayer First Act, 

Public Law 116–25, 133 Stat. 981 (2019) 

(TFA) on July 1, 2019. On December 23, 

2019, the Department of the Treasury 

(Treasury Department) and the IRS 

published in the Federal Register (84 

FR 70462) a notice of proposed 

rulemaking (REG–116163–19) providing 

the procedures under section 6402(n) 

for reporting, identification, and 

recovery of a misdirected direct deposit 

refund. The Treasury Department and 

the IRS received one comment 

responding to the proposed regulations. 

The comment is available at 

www.regulations.gov or upon request. 

No public hearing was requested or held 

on the proposed regulations. 

After consideration of the written 

comment, this Treasury Decision adopts 

the proposed regulations as final 

regulations with minor modifications, as 

described in the Summary of Comments 

and Explanation of Provisions. A 

detailed explanation of these regulations 

can be found in the preamble to the 

proposed regulations. 

Summary of Comments and 

Explanation of Provisions 

The Treasury Department and the IRS 

received one comment regarding the 

proposed regulations. After 

consideration of the comment, the 

proposed regulations are adopted as 

final regulations without any 

substantive changes. 

I. Applicability Date 

A commenter expressed a concern 

that the procedures in these regulations 

would not apply to claims for refund 

from taxable years before the 

applicability date of the final 

regulations. The commenter requested 

that the procedures should be applied to 

refund claims for prior years. Consistent 

with the comment, the final regulations 

clarify that these procedures apply to 

any report of a misdirected direct 

deposit refund for a current or prior year 

submitted after the publication of the 

final regulations in the Federal Register. 

II. Coordination With Financial 

Institutions 

Section 301.6402–2(g)(1) of the 

proposed regulations defines 

‘‘misdirected direct deposit refund’’ as 

any refund of an overpayment of tax 

that is disbursed as a direct deposit but 

is not deposited into the account 

designated on the claim for refund to 

receive the direct deposit refund. The 

proposed regulations include in the 

definition of a misdirected direct 

deposit refund only those refunds 

which are actually issued as a direct 

deposit. A misdirected direct deposit 

refund does not include an overpayment 

that is credited against another 

outstanding tax liability of the taxpayer 

pursuant to section 6402(a) or that is 

offset pursuant to the law. An 

overpayment that is offset or applied as 

mandated by law is not a misdirected 

direct deposit refund because these 

actions are mandated by law. Section 

301.6402–2(g)(1) of the final regulations 

clarifies this by striking the last 

sentence from the proposed regulations, 

as it is not needed to define a 

‘‘misdirected direct deposit refund.’’ 

Instead, the final regulations clarify in 

section 301.6402–2(g)(3)(i) that the 

offset or setoff of an overpayment occurs 

prior to the issuance of a direct deposit. 

The IRS will determine if a reported 

missing refund is setoff or offset as part 

of the procedure for the identification of 

the account that received the 

misdirected direct deposit refund. This 

reorganization simplifies the definition 

of a misdirected direct deposit refund 

and more accurately describes the 

process of identification of a 

misdirected direct deposit refund. 

The final regulations reflect this 

clarification to the definition of a 

misdirected direct deposit refund and 

the identification procedure, but the 

proposed regulations are otherwise 

adopted without change. 

Special Analyses 

This regulation is not subject to 

review under section 6(b) of Executive 

Order 12866 pursuant to the 

Memorandum of Agreement (April 11, 

2018) between the Treasury Department 

and the Office of Management and 

Budget regarding review of tax 

regulations. 

These regulations do not impose any 

additional information collection 

requirements in the form of reporting, 

recordkeeping requirements, or thirdparty disclosure requirements related to 

tax compliance. However, because a 

taxpayer or a taxpayer’s representative 

may elect to report a missing refund 

using the procedures described in 

§ 301.6402–2(g)(2)(ii)(B), some taxpayers 

may use a form to report a missing 

refund. The collection of information in 

§ 301.6402–2(g)(2)(ii)(B) is through use 

of a Form 3911, ‘‘Taxpayer Statement 

Regarding Refund,’’ and is the sole 

collection of information requirement 

established by the final regulations. 

For the purposes of the Paperwork 

Reduction Act, 44 U.S.C. 3501–3520, 

the reporting burden associated with the 


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