52354 Federal Register / Vol. 74, No. 195 / Friday, October 9, 2009 / Proposed Rules 

DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

24 CFR Part 200 

[Docket No. FR–5290–P–01] 

RIN 2502–AI73 

Prohibition of the Escrowing of Tax 

Credit Equity 

AGENCY: Office of the Assistant 

Secretary for Housing—Federal Housing 

Commissioner, HUD. 

ACTION: Proposed rule. 

SUMMARY: This proposed rule would 

conform HUD’s Federal Housing 

Administration (FHA) multifamily 

mortgage insurance regulations to a 

provision in Title VIII of the Housing 

and Economic Recovery Act of 2008 that 

prohibits a requirement that tax credit 

sales proceeds be placed into escrow, at 

the time of initial endorsement, for 

assurance of project completion and to 

pay the initial service charge, carrying 

charges, and legal and organizational 

expenses incident to the construction of 

the project. This rule would not prohibit 

HUD from requiring escrows of funds 

for other purposes, such as for working 

capital. The rule would also make other 

changes intended to reduce burdens on 

the use of tax credits. 

DATES: Comments Due Date: December 

8, 2009. 

ADDRESSES: Interested persons are 

invited to submit comments regarding 

this proposed rule. There are two 

methods for comments to be submitted 

as public comments and to be included 

in the public comment docket for this 

rule. Regardless of the method selected, 

all submissions must refer to the above 

docket number and title. 

1. Submission of Comments by Mail. 

Comments may be submitted by mail to 

the Regulations Division, Office of 

General Counsel, Department of 

Housing and Urban Development, 451 

Seventh Street, SW., Room 10276, 

Washington, DC 20410–0001. 

2. Electronic Submission of 

Comments. Interested persons may 

submit comments electronically through 

the Federal eRulemaking Portal at 

www.regulations.gov. HUD strongly 

encourages commenters to submit 

comments electronically. Electronic 

submission of comments allows 

commenters maximum time to prepare 

and submit comments, ensures their 

timely receipt by HUD, and enables 

HUD to make them immediately 

available to the public. Comments 

submitted electronically through the 

www.regulations.gov Web site can be 

viewed by other commenters and 

interested members of the public. 

Commenters should follow the 

instructions provided on that Web site 

to submit comments electronically. 

Note: To receive consideration as public 

comments, comments must be submitted 

through one of the two methods specified 

above. Again, all submissions must refer to 

the docket number and title of the rule. No 

Facsimile Comments. Facsimile (FAX) 

comments are not acceptable. 

Public Inspection of Public 

Comments. All properly submitted 

comments and communications 

submitted to HUD will be available, 

without charge, for public inspection 

and copying between 8 a.m. and 5 p.m. 

weekdays at the above address. Due to 

security measures at the HUD 

Headquarters building, an advance 

appointment to review the public 

comments must be scheduled by calling 

the Regulations Division at 202–708– 

3055 (this is not a toll-free number). 

Individuals with speech or hearing 

impairments may access this number 

through TTY by calling the toll-free 

Federal Information Relay Service at 

800–877–8339. Copies of all comments 

submitted are available for inspection 

and downloading at 

www.regulations.gov. 

FOR FURTHER INFORMATION CONTACT: Iris 

Agubuzo, Project Manager, Policy 

Division, Office of Multifamily Housing, 

Department of Housing and Urban 

Development, 451 Seventh Street, SW., 

Room 6158, Washington, DC 20410– 

8000, Telephone 202–402–2662 (this is 

not a toll-free number). Individuals with 

speech or hearing impairments may 

access this number through TTY by 

calling the toll-free Federal Information 

Relay Service at 800–877–8339. 

SUPPLEMENTARY INFORMATION: 

I. Background 

The low-income housing tax credit is 

a tax incentive provided under section 

42 of the Internal Revenue Code of 1986, 

26 U.S.C. 42, to increase the availability 

of low-income housing. Section 42 

provides a nonrefundable income tax 

credit to owners of qualified buildings. 

Qualified buildings are newly 

constructed or substantially 

rehabilitated buildings in which a 

percentage of the units are designated 

for low-income rental housing, or 

certain newly acquired, federally 

subsidized buildings. The owner of a 

qualified building may claim a credit 

against taxes for 10 years equivalent to 

the applicable credit percentage, 

dependent on the type of building, 

multiplied by the qualified basis of the 

building. The qualified basis is the 

applicable fraction of the eligible basis 

of the building. The fraction is 

calculated by one of two methods, either 

the floor space devoted to low-income 

units as a percentage of the total floor 

space of residential units, or the number 

of low-income units in the building as 

a percentage of the total number of 

units. To calculate the tax credit, the 

qualified basis is multiplied by a 

percentage that differs depending on the 

type of building, the year it was placed 

in service, and possibly other factors 

affecting the eligible basis, as stated in 

the statute. The owners of low-income 

housing buildings must apply to state 

and local agencies for the tax credits, 

which are actually granted only by state 

governments. The owners that receive 

tax credit allocations can then sell or 

syndicate the tax credits. 

The New Markets Tax Credit is a tax 

credit provided under section 45D of the 

Internal Revenue Code of 1986, 26 

U.S.C. 45D. This tax credit is for 

investments in a qualified community 

development entity that uses 

‘‘substantially all’’ of the investment to 

make qualified low-income community 

investments, and designates the 

investment for the purposes of section 

45D. The credit given is an applicable 

percentage of the investment at the date 

of initial issue, as determined under the 

statute. 

The historic tax credit referenced in 

24 CFR 200.54 is a credit against taxes 

for rehabilitation of historic structures 

authorized under section 47(a)(2) of the 

Internal Revenue Code of 1986, 26 

U.S.C. 47(a)(2). The amount of the credit 

is 20 percent of the qualified 

rehabilitation expenditures for certified 

historic structures, or 10 percent for 

qualified rehabilitated buildings first 

placed in service before 1936, other than 

certified historic structures. The 

program is jointly administered by the 

U.S. Department of the Interior and the 

U.S. Department of the Treasury, and 

applies to rehabilitation of certified 

historic structures. 

Section 2834(c) of HERA, Public Law 

110–289 (approved July 30, 2008) adds 

a new section to the National Housing 

Act. This new section is codified at 12 

U.S.C. 1715s, which is section 228 of 

the National Housing Act (this is a 

previously repealed section). This new 

section states, in relevant part: 

(b) Acceptance of Letters of Credit.—In the 

case of an insured mortgage covering a tax 

credit project, the Secretary may not require 

the escrowing of equity provided by the sale 

of any low-income housing tax credits for the 

project pursuant to section 42 of the Internal 

Revenue Code of 1986, or any other form of 

security, such as a letter of credit. 

This provision changes the practice 

allowed by current HUD regulations and 

mstockstill on DSKH9S0YB1PROD with PROPOSALS3

Federal Register / Vol. 74, No. 195 / Friday, October 9, 2009 / Proposed Rules 52355 

policies, which is to require a 

substantial portion of the low-income 

housing tax credit equity under 26 

U.S.C. 42 to be placed in escrow for 

potential future use over the life of the 

project at the time of initial 

endorsement. That requirement often 

means that mortgage borrowers, who 

have not realized their tax credit 

proceeds at this point, would have to 

obtain costly bridge loan financing. This 

requirement has had an inhibiting effect 

on the building of new low-income 

housing tax credit projects. 

The new law prevents HUD from 

requiring the escrow of tax credit 

proceeds. HUD believes that, as a result, 

the need for bridge loans will be 

substantially reduced and hence make 

multifamily housing more available and 

affordable. The new law does not 

prohibit HUD from requiring the use of 

monies, which may derive from tax 

credit proceeds, for upfront expenses. 

Such an amount would vary depending 

on the underwriting requirements of the 

project. 

HUD’s regulation at 24 CFR 200.54 is 

designed to allow HUD to require a 

payment of funds sufficient to ensure 

project completion. That regulation 

states: ‘‘The mortgagor shall deposit 

with the mortgagee cash deemed by the 

Commissioner to be sufficient, when 

added to the proceeds of the insured 

mortgage, to assure completion of the 

project and to pay the initial service 

charge, carrying charges, and legal and 

organizational expenses incident to the 

construction of the project.’’ (24 CFR 

200.54 undesignated introductory 

paragraph.) The regulation also allows 

for a ‘‘lesser cash deposit’’ in cases 

where ‘‘required funding is to be 

provided by a grant or loan from a 

Federal, State, or local government 

agency or instrumentality.’’ However, 

because proceeds from tax credits are 

not explicitly mentioned, HUD’s 

position has been that the allowance of 

a ‘‘lesser cash deposit’’ does not apply 

in cases where a portion of the funding 

will be realized from tax-credit 

proceeds. To be considered sufficient, 

HUD deemed it necessary to require the 

escrowing of all, or a substantial portion 

of, an amount equal to the tax credit 

proceeds expected to be realized. Thus, 

HUD has required a substantial cash 

deposit, often derived from a bridge 

loan, in such cases. 

On July 22, 2008, HUD issued 

Mortgagee Letter 2008–19, entitled 

‘‘Streamlined Processing of Multifamily 

Mortgage Insurance Applications 

Involving Low-Income Housing Tax 

Credits.’’ This mortgagee letter reduced 

the amount of tax-credit proceeds 

required for the cash escrow from 100 

percent of such proceeds to a varying 

amount, but generally at least 20 percent 

of such proceeds, unless HUD 

authorizes a lower amount. This aspect 

of the mortgagee letter is now 

superseded by the new statutory 

provision, which precludes the 

‘‘escrowing of equity provided by the 

sale of any low-income housing tax 

credits [emphasis added].’’ 

II. This 2009 Proposed Rule 

This proposed rule would conform 24 

CFR 200.54 to section 2834(c) of HERA, 

codified as 12 U.S.C. 1715s. The 

regulatory section would now 

specifically prohibit HUD from 

requiring the escrowing of equity from 

the sales of tax credits. This change is 

mandated directly by the statute, so 

HUD has no discretion in this regard. 

In addition, the proposed rule would 

change the current treatment of historic 

and new market housing tax credits, 

which are not controlled by the statute. 

Hence, HUD has some discretion as to 

how these types of tax credits are 

considered in the underwriting of 

projects. Specifically, the escrow 

requirement would be eliminated when 

equity is provided from these types of 

tax credits. Finally, proceeds from New 

Market Tax Credits would be added to 

24 CFR 200.54(b) as a type of funding 

that need not be fully disbursed prior to 

the disbursement of the mortgage 

proceeds, where approved by the 

Commissioner. 

III. Findings and Certifications 

Environmental Impact 

This proposed rule does not direct, 

provide for assistance or loan and 

mortgage insurance for, or otherwise 

govern or regulate, real property 

acquisition, disposition, leasing, 

rehabilitation, alteration, demolition, or 

new construction, or establish, revise or 

provide for standards for construction or 

construction materials, manufactured 

housing, or occupancy. Accordingly, 

under 24 CFR 50.19(c)(1), this proposed 

rule is categorically excluded from 

environmental review under the 

National Environmental Policy Act of 

1969 (42 U.S.C. 4321). 

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. 

In accordance with the Regulatory 

Flexibility Act (5 U.S.C. 605(b)), this 

proposed rule was reviewed before 

publication, and the undersigned 

certifies that this rule does not have a 

significant economic impact on a 

substantial number of small entities. 

There are no anticompetitive 

discriminatory aspects of the rule with 

regard to small entities and there are no 

unusual procedures that need to be 

complied with by small entities. This 

rule will allow mortgagors to retain 

more of their tax credit proceeds and, in 

many cases, relieve them of the need to 

take out a costly bridge loan to pay the 

costs for assurance of completion. 

Therefore, this rule, in conformance 

with statutory mandate, removes a 

costly regulatory requirement and does 

not impose any substantial economic 

impact on small entities. 

Therefore, the undersigned certifies 

that this proposed rule will not have a 

significant economic impact on a 

substantial number of small entities, 

and that an initial regulatory flexibility 

analysis is not required. 

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 

proposed rule does not have federalism 

implications and does not impose 

substantial direct compliance costs on 

state and local governments or preempt 

state law within the meaning of the 

executive order. 

Unfunded Mandates Reform Act 

Title II of the Unfunded Mandates 

Reform Act of 1995 (2 U.S.C. 1531– 

1538) (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 the 

meaning of UMRA. 

List of Subjects in 24 CFR Part 200 

Administrative practice and 

procedure, Government contracts, 

Organization and functions 

(Government agencies). 

Catalog of Federal Domestic Assistance 

The Catalog of Federal Domestic 

Assistance (CFDA) program numbers for 

the programs related to this rulemaking 

are 14.112, 14.123, 14.126, 14.134, 

mstockstill on DSKH9S0YB1PROD with PROPOSALS3

52356 Federal Register / Vol. 74, No. 195 / Friday, October 9, 2009 / Proposed Rules 

14.135, 14.138, 14.139, 14.151, and 

14.155. 

For the foregoing reasons, HUD 

proposes to amend 24 CFR part 200 as 

follows: 

PART 200—INTRODUCTION TO FHA 

PROGRAMS 

1. The authority citation for part 200 

continues to read as follows: 

Authority: 12 U.S.C. 1702–1715z–21; 42 

U.S.C. 3535(d). 

2. Revise § 200.54 to read as follows: 

§ 200.54 Project completion funding. 

(a) Except as provided in paragraph 

(c) of this section, the mortgagor shall 

deposit with the mortgagee cash deemed 

by the Commissioner to be sufficient, 

when added to the proceeds of the 

insured mortgage, to assure completion 

of the project and to pay the initial 

service charge, carrying charges, and 

legal and organizational expenses 

incident to the construction of the 

project. The Commissioner may accept 

a lesser cash deposit or an alternative to 

a cash deposit in accordance with terms 

and conditions established by the 

Commissioner, where the required 

funding is to be provided by a grant or 

loan from a federal, state, or local 

government agency or instrumentality. 

(b) An agreement acceptable to the 

Commissioner shall require that funds 

provided by the mortgagor under 

requirements of this section must be 

disbursed in full for project work, 

material, and incidental charges and 

expenses before disbursement of any 

mortgage proceeds, except that lowincome housing tax credit syndication 

proceeds, historic tax-credit syndication 

proceeds, New Markets Tax Credits 

proceeds, or funds provided by a grant 

or loan from a federal, state, or local 

governmental agency or instrumentality 

under requirements of this section need 

not be fully disbursed before the 

disbursement of mortgage proceeds, 

where approved by 

(c) In the case of a mortgage insured 

under any provision of this title 

executed in connection with the 

purchase, construction, rehabilitation, 

or refinancing of a multifamily tax 

credit project, the Commissioner may 

not require: 

(1) The escrowing of equity provided 

by Low-Income Housing Tax Credits for 

the project pursuant to Title 26, section 

42 of the Internal Revenue Code of 1986; 

(2) The escrowing of equity provided 

by historic rehabilitation tax credits, 

New Markets Tax Credits, or any other 

form of security, such as a letter of 

credit. 

Dated: September 4, 2009. 

David H. Stevens, 

Assistant Secretary for Housing—Federal 

Housing Commissioner. 

[FR Doc. E9–24338 Filed 10–8–09; 8:45 am] 

BILLING CODE 4210–67–P 

mstockstill on DSKH9S0YB1PROD with PROPOSALS3