77230 Federal Register / Vol. 65, No. 237 / Friday, December 8, 2000 / Rules and Regulations

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

24 CFR Parts 5 and 200

[Docket No. FR–4452–F–02]

RIN 2501–AC45

Uniform Physical Condition Standards

and Physical Inspection Requirements

for Certain HUD Housing;

Administrative Process for

Assessment of Insured and Assisted

Properties

AGENCY: Office of the Assistant

Secretary for Housing—Federal Housing

Commissioner, HUD.

ACTION: Final rule.

SUMMARY: This rule establishes for

multifamily housing certain

administrative processes by which HUD

will notify owners of HUD’s assessment

of the physical condition of their

multifamily housing; the owners, under

certain circumstances, will be provided

an opportunity to seek technical review

of HUD’s physical condition assessment

of the multifamily housing; and HUD

may take action in certain cases where

the housing is found not to be in

compliance with the physical condition

standards. This rule follows publication

of a November 26, 1999 proposed rule

and takes into consideration public

comment received on the proposed rule.

DATES: Effective Date: January 8, 2001.

FOR FURTHER INFORMATION CONTACT: For

further information about multifamily

issues covered by this rule, contact:

Kenneth Hannon, Office of Housing,

Department of Housing and Urban

Development, 451 Seventh Street, SW,

Room 6274, Washington, DC 20410;

telephone (202) 708–0547, ext. 2599

(this is not a toll-free number).

For further information about the

scoring methodology or the technical

review process, contact: Wanda Funk,

Real Estate Assessment Center,

Department of Housing and Urban

Development, 1280 Maryland Avenue,

SW, Suite 800, Washington, DC, 20024;

telephone Technical Assistance Center

at 1–888–245–4860 (this is a toll-free

number).

For both offices, persons with hearing

or speech impairments may access that

number via TTY by calling the Federal

Information Relay Service at 1–800–

877–8339.

SUPPLEMENTARY INFORMATION:

I. Uniform Physical Conditions

Standards and Uniform Physical

Inspection Protocol

This final rule follows publication of

a November 26, 1999, proposed rule (65

FR 66539) and builds on the rule issued

by HUD on September 1, 1998 (63 FR

46566), that established uniform

physical condition standards for public

housing, and housing that is insured

and/or assisted under certain HUD

programs (collectively, HUD properties).

The September 1, 1998, final rule also

established a uniform physical

inspection protocol, based on

computerized software developed by

HUD, that allows HUD to determine

compliance with these standards. The

uniform physical condition standards

are intended to ensure that HUD

program participants carry out their

legal obligations to maintain HUD

properties in a condition that is decent,

safe, sanitary and in good repair. The

uniform inspection protocol is intended

to assure that, to the greatest extent

possible, there is uniformity and

objectivity in the evaluation of the

physical condition of HUD properties.

The preamble to the November 26,

1999, proposed rule provided a detailed

overview of HUD’s proposal for the

administrative process for the

assessment of insured and assisted

housing, and the basis for HUD’s

proposal. The preamble to this rule does

not repeat that information.

II. Significant Changes Made at This

Final Rule Stage

The following highlights significant

changes made to the proposed

regulations at this final rule stage.

• HUD amends § 5.705 to remove

paragraph (b). Paragraph (b) of this

section provides that HUD will notify

the public when the inspection software

for HUD’s physical inspection protocols

and the accompanying guidebook are

issued and available. This section

further provides that HUD will publish

a notice in the Federal Register to

inform the public when the software

and guidebook are available, and the

notice will provide 30 days within

which covered entities must prepare to

conduct inspections in accordance with

part 5, subpart G. The notice described

by § 5.705 was published earlier in the

Federal Register. Since HUD has

published the notice in accordance with

§ 5.705(b), paragraph (b) is no longer

relevant and is removed by this rule.

• HUD amends § 200.853, which lists

the HUD multifamily programs to which

HUD’s physical condition standards and

physical inspection protocols are

applicable. For the Section 241 Program

(Section 241 of the National Housing

Act—Supplemental Loans for

Multifamily Projects), HUD clarifies that

Section 241 properties are subject to

inspection, except where the primary

(first or senior) loan is insured or

assisted by HUD under another program

listed in § 200.853. Without this

clarification, the regulatory language

would subject Section 241 properties to

two inspections—one inspection under

the Section 241 program, and one

inspection under another program

covered by this subpart.

• HUD amends § 200.855 to add a

new paragraph (b) to clarify that for a

property with more than one HUD

insured loan, only the first mortgage

lender is required to conduct the

physical inspection. The second

mortgage lender, however, must be

provided a copy of the physical

inspection report by the first mortgage

lender.

• HUD also amends § 200.855 to add

a new paragraph (c) that specifies when

the responsible entity must perform the

required physical inspection. For

example, all annual inspections must be

performed in the following calendar

year and no earlier than 9 months and

no later than 15 months from the date

of the last inspection. Comparable time

periods are provided for inspections

that must occur every two years and

those that must occur every three years.

This new paragraph (c) also provides

that a newly endorsed multifamily

property will receive its first physical

inspection no earlier than 21 months

but not later than 27 months from the

date of final endorsement, but in no

event shall the inspection be performed

after the end of the calendar year

following the two year anniversary date

of final endorsement.

HUD is aware that linking the timing

of the inspection to the calendar year

may constrain the flexibility to schedule

some inspections, but HUD believes that

coordinating the timing of the

inspection with the end of a calendar

year is important to ensuring that

information required to be reported by

the end of a calendar year is reported by

such deadline and properties are

scheduled for inspection at their

appropriate cycle.

On the subject of when the

responsible entity must conduct its

physical inspection, HUD advises in

this preamble and in the notice

published elsewhere in today’s edition

of the Federal Register that HUD will

complete all annual inspections

required of properties covered by this

part through December 31, 2000.

Responsible entities should begin

preparations for either one year and two

year cycle inspections in accordance

with this rule.

• HUD amends § 200.857 to provide

for designation of properties as either

standard 1, standard 2, or standard 3, on

the basis of fixed points, not percentile

Federal Register / Vol. 65, No. 237 / Friday, December 8, 2000 / Rules and Regulations 77231

groupings as provided by the proposed

rule. Properties receiving scores of 90

points or higher on a physical

inspection will be designated as

standard 1. Properties receiving scores

of 80 points or higher but less than 90

on a physical inspection will be

designated as standard 2. Properties

receiving scores of less than 80 will be

designated as standard 3. Because scores

can include fractions (e.g. 89.3), a score

that includes a fraction below one half

point will be rounded down, and a score

that includes a fraction of one half point

or higher will be rounded up. For

example, a property score of 89.5 or 89.6

will be rounded to 90 and the property

will be designated as standard 1. A

property score of 89.4 will be rounded

down to 89 and the property will be

designated as standard 2.

HUD received considerable comment

on the method provided in the proposed

rule by which properties are designated

as standard 1, 2 or 3. The commenters

opposed designation on the basis of

percentile groupings and recommended

that designation be made on the basis of

fixed points. HUD agreed with the

recommendations of the commenters

and has made this change at this final

rule stage. HUD recognizes that fixed

points provide a clear standard,

understandable by those being rated at

the time they are rated. HUD also

recognizes that fixed point scores

provide additional incentive for

improvement since with a fixed score,

owners know that improvement to a cut

point will result in a less burdensome

inspection schedule. HUD welcomes

any additional comments on the change

from a percentile approach to a fixed

point approach in the designation of

properties as standard 1, 2, or 3, and

may make adjustments on the basis of

comments received.

• HUD amends paragraph (a) of

§ 200.857 to remove reference to REAC’s

baseline physical inspection of

properties. The baseline review has

been completed.

• HUD amends paragraph (c) of

§ 200.857 to clarify that the 72 hours to

report correction of exigent health and

safety violations refers to 3 business

days from the date of the physical

inspection.

• HUD amends paragraph (d)(4) of

§ 200.857 to revise the definition of

‘‘significant improvement’’ to mean the

correction of a material error, asserted

by the owner, which causes the score for

the owner’s property to cross an

administratively significant threshold

(for example, the property would be

redesignated from standard 3

performing to standard 2 performing or

from standard 2 performing to standard

1 performing), or result in an increase

of 10 points or more (new language is

highlighted).

• HUD amends paragraph (e) of

§ 200.857 to provide that if an owner

requests an adjustment of the physical

condition score based on considerations

other than those for technical review

after the physical inspection report has

been submitted to the owner (either

electronically through the internet or by

mail), the owner must make a request

for adjustment to REAC within 45 days

following submission of the report to

the owner by REAC. HUD may, but is

not required to consider requests made

after that period. However, since the

items that may be requested as a basis

for score adjustment are unique and not

subject to addition and change from

period to period, owners are strongly

encouraged to request database

corrections prior to inspections. In this

way, the inspection results can fully

consider approved corrections,

eliminating score deductions for

approved database corrections and the

need for post report adjustments. HUD

also amends this paragraph to provide

that requests for database adjustments

are to be directed to REAC. The

proposed rule provided for requests to

be submitted to the applicable HUD

Field Office. Since REAC, however, is

the point of contact for requests for

technical review, HUD determined that

REAC is also the appropriate point of

contact for requests for database

adjustments.

• HUD adds a new paragraph (f) to

§ 200.857 to clarify when an owner’s

physical condition score becomes final.

This new paragraph also notes that final

physical condition scores will be made

public by HUD, and the owner must

make its physical inspection

information (the physical inspection

report, scores) available to residents to

review upon request during business

hours. Paragraph (f), (g) and (h) in the

proposed rule are redesignated (h), (i)

and (j), respectively.

• HUD adds a new paragraph (g) to

§ 200.857 to require an owner to notify

its residents of upcoming physical

inspections of the owner’s property and

to clarify the documents related to the

physical condition scoring process that

the owner must make available to its

residents and when these documents

must be made available. HUD also

welcomes any additional comments on

new paragraph (g).

• HUD amends newly designated

paragraph (h) of § 200.857 to provide

that a multifamily property that receives

a score of 30 points or less on its

physical condition inspection will be

referred to HUD’s Departmental

Enforcement Center for evaluation.

In addition to these changes, HUD has

made certain editorial and technical

changes throughout the rule for the

purposes of clarity.

III. Discussion of Public Comments

At the close of the public comment

period on the November 26, 1999,

proposed rule, HUD received 53 public

comments. The commenters included

residents, resident organizations and

resident advocates, two housing

authorities, nonprofit housing providers

and housing industry organizations and

associations.

In the discussion of public comments

that follows, the heading ‘‘Comment’’

states the issue, opinion,

recommendation or question raised by

the commenter or commenters, and the

heading ‘‘Response’’ presents HUD’s

response to the issue, question or

recommendation raised by the

commenters.

Resident Involvement in the Physical

Inspection Process

Many of the resident commenters on

the rule stated that the rule should

provide for more resident involvement

in the physical inspection process. The

comments on resident involvement are

as follows.

Comment. The proposed rule omits

almost completely resident involvement

in the physical inspection process. The

rule should provide for resident

involvement in the physical inspection

process and specifically, provide for

residents to be notified of the physical

inspection results, as well as be

provided with copies of the inspection

report, any related documents, any

owner appeals, and compliance plans.

The rule also should provide for the

issuance of quality control reports that

include the input of residents. These

recommended provisions should be

placed in a new regulatory section that

will address how residents will

participate in the physical inspection

process.

Response. HUD recognizes the

importance of involving residents in the

physical inspection process to ensure

that their housing is decent, safe,

sanitary and in good repair. HUD

declines, however, to adopt the

suggestion that the rule require resident

involvement in the physical inspection

of the housing as recommended by the

commenters. HUD has had many

discussions with resident groups on this

topic and has explained that the

inspection process itself does not lend

itself to conversational input. Instead,

77232 Federal Register / Vol. 65, No. 237 / Friday, December 8, 2000 / Rules and Regulations

the process relies on objective

observation.

To ensure that there is sufficient

opportunity for the residents to

participate in seeing that all necessary

repairs are made in a timely, efficient

and comprehensive manner, HUD is

making several changes to the rule at

this final rule stage. As noted earlier in

this preamble, HUD is requiring owners

to notify their residents of upcoming

physical inspections of their units and

the housing development, generally.

HUD is also requiring owners to make

the physical inspection information (the

physical inspection report, scores)

available to residents to review upon

request during regular business hours.

With respect to the results of a

property’s physical condition, HUD will

make public the results of the physical

inspection scores of the properties

similar to the manner in which HUD

makes public the results of physical

inspection scores of public housing

under the Public Housing Assessment

System.

Comment. Residents should have the

same right of appeal of physical

inspection scores that is provided to

owners. Residents should have the right

to appeal any and all aspects of the

physical inspection finding, and appeals

should not be limited to material errors.

Response. The responsibility for the

physical condition of the property rests

with the owner. It is the owner’s

responsibility to review the physical

inspection report, and to submit

information clearly describing the errors

and omissions that have a significant

impact on the physical inspection score

in accordance with the conditions and

requirements of the rule. However, as

discussed earlier in this preamble, HUD

has added a new paragraph at this final

rule stage that requires owners to notify

residents of upcoming physical

inspections of the properties and to

make documents related to the physical

inspection available to the residents,

and that also invites residents to submit

comments directly to HUD on the

condition of the housing in which they

reside.

Comment. A resident representative

should be present for the on-site

physical inspections.

Response. HUD declines to impose

this requirement in its rule. The intent

of the physical inspection process is to

limit the inconvenience to the owner

and the residents of the property being

inspected. HUD believes that increasing

the number of participants in the

physical inspection process could slow

down the inspection (thereby increasing

inconvenience) and also jeopardize the

objectivity of the inspection process.

Comment. The rule should provide

for residents, rather than owners and

managers, to verify that any exigent

health and safety violations have been

corrected by the managers and owners.

Response. Again, the physical

condition of the property is the owner’s

responsibility and correction of exigent

health and safety violations (as well as

other deficiencies) is the owner’s

responsibility, as is the verification that

these violations have been corrected.

The sanctions can be severe if an owner

falsely certifies exigent health and safety

violations have been corrected.

Comment. The rule should provide

that the property inspector is required to

meet with the residents of the property.

The rule also should provide that the

inspectors are to leave a resident a

notice if a unit was inspected and no

one was at home.

Response. HUD declines to adopt

these suggestions. The duties of the

inspector are limited to conducting the

physical inspection of the property.

Notification to absent residents is the

owner’s responsibility. This is one

reason an owner’s representative is

required to accompany the inspector.

HUD notes that several resident

commenters made suggestions about

how a resident survey should be

conducted. Although resident surveys

were part of the rulemaking for HUD’s

Public Housing Assessment System

(PHAS) regulations, they are not part of

this rulemaking, but HUD is further

considering this issue.

Physical Inspection Coverage

Comment. HUD’s physical inspection

software should address tenant

malfeasance or nonfeasance and the

owner should not be penalized for

tenant noncompliance. The physical

inspection needs to be limited to

habitability issues, not tenant

housekeeping/tenant caused conditions,

unless these conditions are a direct

threat to structural soundness or a safety

issue.

Response. HUD’s physical inspection

system is objective and does not

distinguish between those defects that

are the fault of a resident and those that

are the fault of the owner. The physical

inspection system is simply a tool for

observing and transmitting data

regarding the physical condition of the

property at the time of the inspection.

An owner of HUD assisted or insured

housing is contractually responsible for

maintaining the physical condition of

the property. HUD anticipates that

owners of such assisted or insured

rental properties, like all landlords, will

rely on lease provisions regarding the

resident maintenance or destruction of

the units, and HUD encourages owner to

do so in compliance with the physical

condition standards. Good property

management, which includes regular

housekeeping and preventative

maintenance inspections through the

year, coupled with strict lease

enforcement will result in wellmaintained housing that meets the

standard.

Comment. The rule should view as

health and safety issues the basic

accessibility design features which are

required in federally funded housing

units to assure all people can safely

utilize the dwellings. Proper and

required accessible design features

contribute to the overall well being,

both physically and financially of the

housing. The rule also should clarify

that deficiencies with any physical

accessibility features of the units (or the

housing, generally, will be classified as

Exigent Health and Safety Deficiencies

and shall require resolution.

Response. Housing design, including

accessibility design, is not a feature of

HUD’s Uniform Physical Condition

Standards. HUD’s Uniform Physical

Condition Standards focus on whether

the housing is habitable, is decent, safe,

sanitary and in good repair. HUD’s

Office of Fair Housing and Equal

Opportunity is charged with

determining compliance with

accessibility requirements under the

Fair Housing Act or Section 504 of the

Rehabilitation Act of 1973 where

complaints of violation of these

statutory requirements have been

alleged. (This office, however, is not

responsible for ongoing inspections of

maintenance of accessibility features in

a unit or building.) To assist HUD’s

Office of Fair Housing and Equal

Opportunity in its task, the inspection

collects specific information related to

general accessibility. This information is

provided to the Office of Fair Housing

and Equal Opportunity in the event

such information reveals a absence of

accessible features where these features

should exist.

Ranking and Thresholds for Designation

The overwhelming majority of

commenters who commented on the

proposed performance designations (i.e.,

Standard 1, Standard 2, Standard 3),

which were based on percentile

groupings, were opposed to the

percentage groupings and requested that

performance categorizations be based on

fixed scores. The comments on this

issue included the following.

Comments. The ranking classification

in the proposed rule fails to provide

guidance as to the numeric cut-off for

each performance designation (i.e.,

Federal Register / Vol. 65, No. 237 / Friday, December 8, 2000 / Rules and Regulations 77233

standard 1, standard 2, standard 3.). The

rule should only use numeric

classifications.

The issuance of grades by curving

results will not work. The numeric

scoring has in fact become the standard

in the past 11⁄2 years and should not be

changed. A curved ranking is at odds

with the possibility of a meaningful

appeal.

HUD needs to explain the rationale in

holding public housing to an absolute

standard (under PHAS) and private

HUD assisted housing to a relative

standard based on an absolute grade.

HUD should not use percentages, but

set a score to objectively rank properties

and then conduct annual inspection

only for the marginal properties in the

bottom 17% or so.

With baseline results completed, to

distinguish between properties that all

are deemed to be satisfactory based on

the percentages in the proposed rule is

arbitrary and it increases lender

inspection costs with no apparent

benefit.

An absolute score is preferable to the

standards in the proposed rule.

Response. As noted earlier in this

preamble, this final rule sets the

numeric standards for all three

categories. As noted earlier in this

preamble, HUD recognizes the need by

owners for a clear standard,

understandable by those being rated at

the time they are rated, and fixed points

provide this standard. HUD recognizes

that the percentile approach was

obscure in this regard.

Comment. The rule did not advise

how HUD will make known the numeric

thresholds for the three tiers and how

often the thresholds will be evaluated.

If numerical thresholds are to be applied

based on national numerical thresholds

or will regions have their own discrete

numerical assignments on the

administrative significant thresholds.

Response. All thresholds will be

national. Any changes to the thresholds

will be made only as needed to maintain

the health of HUD’s portfolio, and HUD

will provide appropriate notification of

any changes to the numerical

thresholds.

Frequency of Inspection and PostInspection Processes

Comment. Physical inspections of

properties should be mandatory when

requested by 10% or more of the

residents of a property, or when

requested by a resident organization that

meets HUD’s standards.

Response. HUD declines to adopt this

suggestion as a regulatory requirement.

If there are concerns by residents of the

property in which they reside, they are

encouraged to contact their local HUD

Field Office and relay these concerns,

and HUD will make the appropriate

inquiries to follow-up on these

concerns.

Comment. The frequency of

inspections should be determined by

the property’s score on the 100 point

scale, rather than its score relative to

other properties. It is the condition of

the building that is of concern and it is

only the building’s condition that is

within the owner’s power to control—

not the score relative to other projects.

Response. As noted earlier in this

matter, the rule has been revised to

provide for fixed point scores and the

frequency of inspections is based on

these fixed point scores.

Verification That Repairs Have Been

Made

Comment. Owners should not be

allowed to self-certify that repairs have

been made. This self-certification is at

odds with HUD’s emphasis on strict,

objective, and professional inspections.

When an inspector finds violations,

management is not concerned about

correction of these violations because no

one comes back for two or three years,

and when HUD returns, it is a different

inspector who does not review the

previous report. The rule should require

reinspections by the same inspector to

confirm that repairs have been made.

Response. HUD does not agree that it

is practical or necessary to require that

subsequent inspections be conducted by

the same person, year after year. HUD

and mortgagees will generally use

contract inspectors, and it is not

unusual for contractors or personnel

employed by contractors to change from

year to year. In addition, the design of

HUD’s physical inspection system

focuses on an inspection of the property

that will produce objective, consistent

results. Therefore, the person who

undertakes the inspection, provided the

person is trained and certified to use

HUD’s inspection system, is not a

determining factor in the outcome of the

inspection. Additionally, those

properties for which there are serious

physical concerns are inspected

annually, not every two or three years

as the comment suggests. Given how the

inspection process is conducted, the

certification required of owners is not at

odds with HUD’s inspection system.

The owners’ certification that repairs

have been completed is part of an

ongoing monitoring plan which will

assist HUD in determining if conditions

have improved.

Comment. HUD should take strong

action against owners with seriously

substandard buildings—that is the

owners who fail to comply with the

physical condition standards. The

owner’s properties should be transferred

to a non-profit or to resident owners

who will maintain the properties as

decent, safe and affordable housing.

Response. HUD has no authority to

require the transfer of owners’

properties that have been found

substandard, to a non-profit

organization or residents or resident

organization but, if these organizations

have the resources to correct the

problems, they may be eligible

purchasers of the properties. The rule,

however, provides for the full range of

enforcement actions available to HUD to

initiate against owners who refuse or

fail to comply with HUD’s physical

condition standards.

Comment. With respect to

administrative review of properties and

enforcement actions, the rule should

provide that reinspection of properties

is mandatory where there is a

Departmental Enforcement Center (DEC)

Compliance Plan in place.

Response. HUD declines to adopt this

recommendation as a regulatory

requirement, but HUD notes that the

DEC has the option to take this action

under the rule. Properties under

evaluation by the DEC as a result of

physical condition deficiencies would

be reinspected annually.

Properties Covered by the Rule

Comment. Nursing homes,

intermediate care facilities, assisted

living facilities, and board and care

homes should be excluded from the

rule’s coverage.

Response. HUD requires inspection of

these properties to determine if Federal

Housing Administration (FHA) funds

are at risk and if the physical condition

meets the needs of the resident

population. Since these properties are

insured or HUD-held, a physical

inspection is appropriate.

Comment. Reference to coverage of

Section 241 of the National Housing Act

(NHA) projects (Supplemental Loans for

Multifamily Projects) in the rule should

be modified to provide that these

projects are to be inspected except

where the underlying mortgage is

insured or assisted by HUD under a

program covered in this part. Without

this qualification, there may be

duplication of inspection.

Response. As noted earlier in the

preamble (see Section II), HUD has

made this clarification in this final rule.

Comment. The proposed rule does not

address new construction properties.

New properties in conformance with

HUD’s final cost certification should be

77234 Federal Register / Vol. 65, No. 237 / Friday, December 8, 2000 / Rules and Regulations

given a 3 year waiver before inspection

begins.

Response. As discussed earlier in this

preamble (under Section II), the final

rule addresses newly endorsed

properties and provides for a physical

inspection to be conducted within

approximately two years from final

endorsement.

The Training and Qualifications of the

Physical Inspectors

Comment. The training provided to

inspectors is still not sufficient to

ensure proper application of the

physical condition standards

consistently between properties. While

HUD’s physical condition and

inspection system is clearly more

objective in its design, it is still subject

to wide variations in its implementation

which is attributable, in part, to

minimally trained inspectors looking at

similar conditions and reporting them

with varying degrees of severity. HUD

should implement a uniform method of

training and certification.

Response. The training of inspectors

who are certified in the use of the HUD

inspection protocol is standardized. To

ensure appropriate and adequate

training of inspectors, HUD sought

experts in the field who would take the

lead in actually presenting the materials

developed by HUD and training the

inspectors. In addition to selecting

experts in the field to perform the

training, every inspector candidate must

meet the minimum qualification

requirements determined by HUD. The

inspector candidates also must take the

required course and then take and pass

a test. HUD monitors and controls all

aspects of this training process through

REAC.

Since the inspection under HUD’s

new standards and physical condition

protocols began in approximately

October 1998, the initial start-up

involved some refining as one would

expect given the size and magnitude of

the portfolio to be inspected. In certain

cases, problems were encountered and

HUD responded to these problems. HUD

believes that the process overall,

however, is now running smoothly.

HUD is striving to constantly improve

and refine the process and will continue

to do so in the future. In this regard,

HUD also provides for periodic

retraining of the inspectors, to ensure

that the inspectors are up-to-date and

familiar with any changes made to the

physical condition protocol and

software.

HUD acknowledges that even with

qualification and training requirements

imposed on inspectors, some inspectors,

as is the case in any profession, perform

better than others. REAC monitors the

inspectors, and HUD invites owners that

have concerns about an inspector’s

ability to contact REAC through its

Technical Assistance Center (1–888–

245–4860).

Comment. Inspectors need to have

knowledge of local building and fire

codes in order to conduct an accurate

and informed inspection.

Response. HUD disagrees with this

suggestion. HUD’s physical inspection

protocol have some basis in a national

codes (e.g., fire safety) but there is too

much variation among local and state

codes to make the use of local code an

efficient and effective alternative to

HUD’s physical inspection protocols.

Additionally, the responsibility of HUD

contract inspectors is to determine

whether HUD assisted and assured

housing meets HUD’s Uniform Physical

Condition Standards, not to ensure

enforcement of local building codes.

It is the responsibility of the owner to

be cognizant of and abide by all local

codes. HUD notes, however, that there

are allowances built into HUD’s

physical inspection protocols, as noted

in the November 26, 1999 proposed

rule, that provide for an owner to notify

HUD of significant conflicts between

HUD’s Uniform Physical Condition

Standards and local code requirements

or other local requirements applicable to

the property.

Comment. HUD requires the use of

qualified and trained inspectors but

gives no information on this process so

that a lender’s inspector can benefit

from this training and meet HUD’s

qualifications.

Response. The response to an earlier

comment described the requirements

that individuals must meet to become

HUD contract inspectors. Persons and

firms that are required to comply with

HUD’s Uniform Physical Condition

Standards may seek to have their own

employees trained and certified. The

common element is that the party that

actually performs an inspection (to

conform with HUD requirements) must

complete and pass HUD’s qualification

training and testing for property

inspectors. Each successful candidate

will be issued identification from REAC

as evidence that the candidate has met

all requirements. It is important to note

that parties that wish to better

understand the REAC protocol, may

participate in REAC monitored training.

However, only inspectors who are

working for HUD contractors,

multifamily lenders or who perform

inspections under independent third

party contracts will be issued final

identification. The information about

how to become a HUD contract

inspector is (and has been) available

from REAC’s Internet site at http://

www.hud.gov/reac. Additionally,

interested parties are welcome to call

REAC’s Technical Assistance Center at

1–888–245–4860.

Simplifying and Improving the Scoring

Process

Comment. The rule should provide a

simpler and abbreviated physical

inspection protocol for smaller

properties where property facilities are

less complicated and the loan balance is

small. Smaller loan balances mean

lenders have less money for inspections.

These properties do not have need for

a complicated, multi-tiered inspection

on amenities and facilities that do not

exist. For smaller properties,

inspections should not be more than

every two years.

Response. HUD is charged with

assuring all housing is decent, safe,

sanitary and in good repair, not just

larger properties or properties with large

loan balances. HUD’s physical

inspection protocols are structured in a

manner to adjust for size and properties

that have amenities and facilities and

those that do not. Additionally, HUD’s

rule provides for cost savings through

less frequent inspections for properties

that are well-maintained. HUD’s

obligation to ensure that its assisted and

insured housing is decent, safe, sanitary

and in good repair does not permit HUD

to exempt a property from an annual

inspection, simply because the property

is a small property.

Comment. The physical inspection

process would be improved if HUD

requires the inspector to clearly

communicate each observable

deficiency and ensures that a detailed

written report of deficiencies is left with

the owner.

Response. HUD agrees with this

comment and all inspectors have been

trained to communicate the defects that

the inspector records to the owner’s

representative during the inspection.

While HUD acknowledges that the

owner’s representative may have

differing views regarding the deficiency

definitions and may express those views

to the inspector, the inspectors are

trained not to engage in a discussion of

the merits of the deficiency definitions.

Inspectors have no authority or

discretion to alter the definitions of

deficiencies or the severity level

assigned. Inspectors must record the

deficiencies in accordance with the

inspection protocol. At this time,

technology that would allow HUD to

leave a copy of the inspection report

immediately following the inspection

remains too expensive. Therefore, a

Federal Register / Vol. 65, No. 237 / Friday, December 8, 2000 / Rules and Regulations 77235

copy is provided to the owner within a

few days of the inspection.

Comment. HUD’s inspection report

should show the score of each

observable deficiency.

Response. HUD has revised the

inspection report to show the points

deducted for each observed deficiency.

Comment. HUD’s physical inspection

protocol should take into consideration

minor routine repairs in assessment.

The weighting that minor repairs

receive can be as much as deferred

maintenance or major repairs.

Therefore, the inspection protocol

software should provide a category of

noted, routine repairs without a point

loss and should note the difference

between minor, routine repairs and

deferred maintenance of capital needs,

and showing the scoring effect should

clarify this.

Response. HUD’s protocol already

takes into consideration minor defects

and repair requirements by way of the

scoring process. The inspection

summary report notes the difference on

a summary basis between routine

repairs and capital needs.

Comment. The rule should define the

meaning and application of ‘‘health and

safety.’’ It is unclear what HUD means

when it refers to health and safety or

how health and safety is scored.

Clarification is important because

failure to correct such a deficiency

could result in demotion from standard

1 or standard 2 to standard 3.

Response. Health and safety concerns

are clarified in 24 CFR 5.703(f), which

this rule cross-references. Exigent health

and safety deficiencies are a distinct

subset of health and safety standards

and are considered a risk to life. A

standard 1 property for which extreme

hazardous conditions are not corrected

would be subject to further inspection

and may change designation as a result

of that reinspection.

Appeal, Technical Review, Burden of

Documentation and Reinspection

Comment. It is unrealistic to require

owners to use the ‘‘Items, Weights and

Criticality’’ document to make the

determination, within 15 days, that an

error has occurred that if corrected

would result in a significant

improvement in the scoring process.

The scoring process is very intricate and

complicated and point values change

dramatically depending on elements at

each specific property.

Response. To address this concern,

HUD has revised the inspection

summary reports so that they will show

the point value for each cited

deficiency.

Comment. The requirement in

§ 200.857(c) to report to HUD within 72

hours of the inspection that exigent

health and safety items have been

mitigated is neither practical nor

reasonable. HUD should allow a

response of 10 working days. The rule

should clarify that the 72 hour limit in

§ 200.857(c) means 3 business days.

Response. The final rule makes the

clarification that 72 hours refers to 3

business days from the date of the

physical inspection, the date the owner

receives the notice of exigent health and

safety deficiencies. HUD, however,

declines to extend this period beyond 3

business days. This time period mirrors

the critical need for the owner to repair

or mitigate the most serious health and

safety conditions immediately.

Comment. The 15 day time period for

response and appeals is unrealistic.

HUD should allow at least 30 days. The

time to evaluate the complex score and

report is the same in order to prepare a

detailed and adequate response and

appeal. HUD should provide owners

with a reasonable time to challenge

inspection results because they have the

burden of proof and must provide

substantial evidence.

Response. HUD declines to expand

the response time. HUD believes 15

days is sufficient time to prepare a

response and submit a request for

technical review. As noted earlier, HUD

requires inspectors to point out defects

as they are observed on the day of the

inspection to the owner’s representative.

The score impact of every item observed

is known at the time the inspection

report is issued to the owner.

Comment. Because the rule relies on

owner responses in prescribed time

periods following HUD’s notification,

the rule should state that time periods

begin after the owner receives notice

from HUD. HUD correspondence is

received/postmarked considerably later

than it is dated.

Response. To avoid delays between

submission of the report to the owner

and the owner’s response to HUD, HUD

is planning to have all inspection

reports available to the owners through

the Internet. For those owners without

Internet capability, HUD will consider

mailing the results. However, HUD

allows, as an allowable project expense,

the reasonable cost of an internet service

provider so that over time we expect

that virtually all properties will have

access either on site, through the agent’s

off site office or a sharing arrangement

with other providers.

Comment. HUD should revise

communications with owners in a way

that the final report presents a more

realistic picture on the property. The

current report focuses on what is wrong

and when it is read in a vacuum,

regardless of the property’s score, the

report presents an out-of-line picture.

Response. The report shows the

potential score of all inspectable items,

not just those items identified as

deficiencies. HUD believes that the

report which now shows the potential

score for all inspectable items combined

with the score for items identified as

deficiencies allows a balanced view.

Comment. The rule takes the right

approach in providing that

reinspections are HUD’s responsibility.

If a mortgagee uses a HUD certified

inspector and HUD’s physical

inspection protocols and the inspection

is technically acceptable then the

mortgagee has fulfilled its obligations. If

the owner challenges the results, the

owner will request HUD, not the

mortgagee, for a reinspection.

Response. The mortgagee is

responsible for performance by its

employees or contractors in a manner to

assess that the product transmitted to

HUD is of good quality. REAC reviews

all inspections and, in the event the

inspection is not acceptable, the

mortgagee, which commissioned the

inspection, must complete the

inspection even though this may mean

having another inspection completed.

REAC makes every effort to cure

problems arising from the review. If this

is not possible, REAC will notify the

mortgagee of the problems and provide

time to correct the errors. However,

some errors such as inadequate

sampling are not correctable without

another visit to the property to complete

the sample required.

Comment. The rule should provide a

process for the owner and management

agent to receive inspection related

communications and to allow the owner

the option to allow simultaneous

electronic release of this information to

additional parties, such as front line

manager, legal counsel board chair, etc.

This would expedite communications

and allow front line operators to have

maximum time to prepare needed

responses.

Response. Once electronic Internet

access is completed, the owner may

designate personnel to act to retrieve

and respond to inspection reports. HUD

will, however, always look to the owner

of record as the party responsible for

action or inaction.

Comment. The errors for which an

owner may request a technical review

and have a reinspection violate the

precepts of fairness. The definitions of

material errors refer to obvious

mistakes, but these are the exception,

not the rule. An inspector’s decision

77236 Federal Register / Vol. 65, No. 237 / Friday, December 8, 2000 / Rules and Regulations

about the seriousness with which an

owner would have a legitimate

disagreement cannot be challenged. The

degree of deficiency is subjective. Three

different inspectors with the same

training and manual at the same

building could come up with disparate

scores because of their own unique

perspective. The rule should allow an

owner to request a technical review in

any circumstance where the property

score is below a standard 1 level. The

grounds for appeal should be broadened

to cover serious problems with the

inspection definitions and with an

inspector’s failure to carry out the

protocol.

Response. HUD disagrees with the

comments. The seriousness of a defect

is not subjective. Each defect is defined

and each inspector is fully trained and

tested to achieve maximum objectivity

in determining the severity of defects. In

addition, the REAC Quality Assurance

personnel are charged with reviewing

work performed by inspectors at regular

intervals and at random.

Comment. A percentage change in the

numeric score is a better trigger for

reinspection and rescoring, not a change

in the standard classification.

Response. HUD disagrees. A large

percentage score may not move a

property out of a particular operating

mode while a small point increase could

change the oversight and general

program eligibility of an owner.

Comment. The rule should make clear

that the lender does not conduct followup inspections.

Response. The lender may wish to

make follow-up inspections as part of its

own quality assurance plan. However, if

an inspection is accepted by REAC,

resolution of the deficiencies is the

responsibility of HUD.

Comment. An issue arises when a

reinspected project may not obtain the

full benefit of a higher score even if

original inspection error is rectified.

With the ‘‘loss limiting’’ algorithms

built into the system because of the

scoring categories, an owner cannot

know if removal of one of several

defects will raise the score to meet a

threshold.

Response. The inspection summary

includes the value of all defects and

thus shows all possible points deducted.

The inspection summary also shows the

total possible points for the site, a given

unit or a given building exterior, etc.,

and this allows a determination of the

extent to which points lost may exceed

the loss limit referred to in the

comment. (Under the scoring

algorithms, the points deducted for the

site of an individual unit building’s

exterior, systems or common areas

cannot exceed the possible points.) If an

error is found that has significant

impact on the score, the owner may

request a technical review. HUD does

not wish to burden the system with

technical review requests that do not

have a significant impact.

Comment. All errors must be

corrected, even if the correction would

not result in the score crossing the

threshold. HUD should provide an

explanation to the owner/manager of the

total score that could be achieved

assuming all identified errors are

corrected. If HUD determines that error

correction will not result in

recategorization, the score should be

adjusted to correct for these errors. If

HUD determines a new inspection is

warranted, it should be at HUD’s

expense. Only when the owner

challenges errors that do not exist

should the owner pay for the

reinspection and any reinspection, if not

paid by HUD, should be an allowable

project expense.

Response. HUD now provides the

absolute point reduction for each and

every defect cited. When no defects are

present, the maximum score is 100

points. The comment appears to suggest

that HUD engage in evaluating owner

request for technical review for even

fractional points which have no effect

on the property. HUD believes this

process does not consider the overall

objective—which is property that is

decent, safe, sanitary and in good repair.

HUD will require the owner to make full

payment for a new inspection that is

performed based on an owner’s

technical review request where the

result does not cross a signification

threshold. This remains a necessary part

of the process from HUD’s perspective

in order not to burden the process with

inconsequential request.

Comment. Upon receipt of satisfactory

second round inspections, HUD should

remove from the permanent project file,

at the owner’s request, the first round

results.

Response. HUD disagrees and will not

remove the results of inspection reports

from the permanent project file.

However, if a subsequent inspection

crosses the threshold from standard 2 to

standard 1, the owner will immediately

be eligible for the every-three-year

inspection. The administrative record

will continue to hold all valid

information.

Comment. The procedures for appeals

should be modified in several respects

to improve effectiveness and efficiency

of the approval process. The procedures

should be modified to allow the expense

of the appeal to be covered in the

budget; to place the burden on HUD to

work with owners to advise them of the

numerical impact of any and all

elements of interest to the owner until

the significant thresholds have been

published and all inspection reports

issued in a way to allow an owner to

readily determine whether or not certain

elements, if successfully appealed,

would meet the administrative

threshold requirement; and require HUD

to reissue all inspection reports using

the new end column format showing the

numerical value for each deficiency at

the owner’s request.

Response. If a technical review is

successful, HUD issues a new report. All

reports now show the points deducted

for each cited defect. The expenses of a

reinspection that does not result in a

significant improvement will remain the

responsibility of the owner and will not

be treated as a property expense.

Comment. HUD should be flexible in

the type of documentation required for

appeals. Owners may have a notarized

letter from the local HUD office or from

a local building code office, or a similar

type of declaration in the absence of

statutory language.

Response. HUD is flexible in the type

of third party reasonable documentation

and will continue to be so.

Comment. The term ‘‘burden of

proof’’ is a legal standard for judicial or

administrative settings with trained

judges and rules with regard to

submission of written and oral

evidence. This term should not be used

lightly without definition to control

appeals from REAC inspectors. It would

be appropriate to state the owner is

expected to provide factual information

supporting its appeal, but once HUD has

that information, HUD’s determination

should be objective without ‘‘weighing’’

documentation based on HUD’s

interpretation of the term.

Response. While ‘‘burden of proof’’ is

a term used in the judicial or

administrative hearing context, the use

of such term is not confined to those

settings. HUD believes that

§ 200.857(d)(2) makes clear the standard

of factual information and supportive

document (i.e., proof) that the owner

must submit.

Comment. Responsibility to show

errors should not rest solely with the

owner but with HUD and the inspector

as well. When the deficiency has a

significant numeric impact and the

owner cannot locate the deficiency,

HUD and/or the inspector should be

required to produce evidence (and visit

the site to point out the deficiency).

Otherwise, HUD should remove the

notation and the scoring impact. During

subsequent inspections, HUD should (i)

reinstate the exit interview for

Federal Register / Vol. 65, No. 237 / Friday, December 8, 2000 / Rules and Regulations 77237

inspectors to point out deficiencies as

they enter them so owners can locate

them and understand the type, (ii) make

notations in the comments section of

repairs done in presence of inspectors,

and (iii) include the owner’s statements

about long range maintenance plans,

etc.

Response. HUD agrees and both the

proposed rule and this final rule allow

for mutual resolution of the claim of a

non-existent deficiency. HUD believes,

however, that the first level of claim that

an error has occurred must come from

the owner in the form of reasonable

documentation. Examples of reasonable

documentation have already been

provided.

Additionally, as noted earlier in this

preamble, inspectors are now requested

to communicate observed deficiencies

orally on site. All inspectors have been

trained to ‘‘call out’’ inspection

deficiencies as they are observed. This

methodology eliminates the need for the

‘‘close out conference’’ and provides the

owner or owner’s representative with a

running account of what is being

recorded as the inspection process is

conducted. Revised definitions

concerning deficiencies allow the

inspector to consider specific areas that

may be cured on site in the presence of

the inspector. For example, if an

electrical panel in a unit is blocked but

the blockage (such as a picture) can be

easily moved in the presence of the

inspector, the defect will not be

recorded. An additional example is the

following—in the event that the site

shows significant litter in and around a

small area, the inspector will not record

the defect if staff is actively working to

remove the litter.

Comment. Owners should not have to

bear costs of reinspection even if results

do not change classification. It is

punitive for owners to bear the cost of

reinspection and it serves to dissuade

appeals if owners bear the cost when the

appeal is unsuccessful. If inspectors

make technical/obvious mistakes that

would improve a numeric score from 32

to 58, owners should not bear the cost.

Owners should not have to pay for what

in most circumstances will be an honest

difference of opinion.

Response. A difference of opinion is

not the same as an error. HUD does not

wish to attempt to dispute an owner’s

opinion but is willing and able to

correct errors committed by inspectors.

As noted in Section II of this preamble,

HUD has revised the rule at this final

rule stage to include in the definition of

‘‘significant improvement’’ a movement

of 10 points or more as a result of the

technical review. Payment for

reinspections that result in less than

significant improvement will be the

responsibility of the owner.

Comment. HUD should clarify that a

third party inspection is objective

evidence supporting any claim of

technical error. HUD also should clarify

that the evidence may be from the

owner if it is reasonable and supported

with more than a new allegation.

Response. If an owner believes that

such an inspection meets the standard

of reasonable documentation, it will be

considered. However, such inspection

should be comparable to the REAC

inspection. The inspection should

present documentation that cites

specific HUD requirements not

opinions.

Comment. A shortfall of the proposed

rule is the inability of the owner/

manager to obtain a revised higher score

by completing repairs or presenting an

acceptable plan for completion to HUD.

The rule should permit an owner/

manager to petition for reinspection

based on repaired conditions, with the

owner paying for all or part of the

reinspection cost.

Response. The inspection protocol is

intended to capture the condition of the

property at a certain point in time. HUD

realizes there will always be some

outstanding maintenance items. Routine

maintenance needs have no significant

impact on the score.

Enforcement Actions

Comment. Dividing appeal decisions

between REAC and HUD Field Offices

makes for a complicated and confusing

appeal system. REAC is responsible for

the technical aspects of inspections,

inputting data, scoring, and objective

information. HUD Field Offices and

Hubs are responsible for area specific,

qualitative judgments such as local code

conflicts with inspection protocol or

whether the facilities are the

responsibility of a third party or

whether ongoing rehabilitation or

maintenance should delay the

inspection. Appeals should be directed

to one HUD office. All appeals should

be directed to the Office of Housing.

Response. HUD does not use the term

‘‘appeal’’ in the rule but understands

that the issues the commenters are

raising concern the technical review

process that is under REAC’s

jurisdiction and the adjustment of

physical condition score due to local

circumstance which, the proposed rule

provided was under the jurisdiction of

the applicable HUD Field Office or Hub.

HUD agrees with the commenters that

requests for review of concerns about a

property’s score should all be directed

to one office and the final rule provides

that the office is REAC.

Comment. The rule needs to provide

a standard for when the HUD Field

Office determines to refer a matter to

HUD’s Departmental Enforcement

Center (DEC).

Response. The final rule provides that

a property that receives a physical

inspection score of 30 or below will be

referred to the DEC for evaluation. This

is a clear and objective standard.

Comment. The rule is clear about the

owner’s responsibilities, but less clear

about the owner’s right to receive a copy

of its file so that everyone is reviewing

the same information. The file includes

information and history beyond the

physical inspection report.

Response. The significant information

for the owner is the inspection report.

To the extent other information is

needed as background, the information

is generally available to the owner from

the local HUD Field Office.

Comment. The role of HUD’s Field

Offices should be clarified in the rule

and Field Office staff should be

encouraged to make judgments when

their experience is at variance with

inspection results.

Response. While HUD highly values

input from its Field Office staff, the key

feature of HUD’s physical inspection

process is to provide for an objective

system. Conclusions drawn from

relationships with owners and personal

knowledge of the properties are

inconsistent with an objective

evaluation of the physical condition of

a property.

Comment. The rule should provide

assurance that no enforcement action

would be initiated prior to a decision on

appeal.

Response. HUD cannot make this

commitment. Circumstances may

compel HUD to take immediate

enforcement action. In fact, the rule

specifically provides that the

administrative process described in the

rule does not prohibit the Office of

Housing, the Departmental Enforcement

Center or HUD generally from taking

whatever action may be necessary

(when necessary) as authorized under

existing statutes, regulations, contracts

or other documents to protect HUD’s

interests in multifamily properties and

to protect the residents of these

properties. (See 24 CFR 200.857(h)(4).)

Comment. The rule states that the

administrative process in the rule will

not be construed to limit HUD’s ability

to take other enforcement actions;

however the extent to which such

actions can be taken should be

described in the rule.

Response. HUD declines to repeat in

this regulation the enforcement actions

that are available to HUD and that are

77238 Federal Register / Vol. 65, No. 237 / Friday, December 8, 2000 / Rules and Regulations

listed in other HUD program regulations

that may be applicable to owners

(depending on the HUD program in

which they participate) or contracts or

other documents. Generally, HUD

participants that are covered by these

other requirements are familiar with

them.

Comment. The rule should make clear

that HUD, not the lender, is responsible

for the compliance plan process. Section

200.857(h) refers to the owner’s

compliance action but does not refer to

HUD’s participation in the process.

Response. This section clearly

provides for the actions and duties that

the DEC may and will undertake and the

DEC is a part of HUD.

Comment. HUD should establish a

Departmental Evaluation Center in

addition to the Departmental

Enforcement Center. Section 200.857(f)

of the proposed rule speaks of

evaluation through administrative

review. It is problematic for properties

to emerge from DEC even when no fault

is found and scoring problems result

from complicated property situations.

Response. HUD’s Departmental

Enforcement Center has the expertise to

perform the administrative review

described in § 200.857(f). There is no

need to establish a separate evaluation

center.

Cost of the Physical Inspection

Comment. The rule does not specify

or limit the financial burden of an

inspection to be placed on lenders. The

rule should state that there will be no

material change in the inspection

process that will materially increase

costs, and the rule should define

‘‘material increase in cost’’ to be no

greater than 5 percent.

Response. Although the rule does not

specify a limitation to the financial cost

of an inspection placed on lenders, as

discussed in the November 1999

proposed rule, HUD has taken

significant steps to minimize the costs

of inspection to lenders and owners.

HUD’s inspection software and

guidebook is distributed to HUD’s

program participants without cost. HUD

also has placed these materials on the

web so that they can be downloaded

and therefore no shipping costs are

incurred. Additionally, in the proposed

rule, HUD advised that it would not

materially alter the physical inspection

requirements in a manner which would

material increase the cost of performing

the inspection (see 64 FR 66535, middle

column.)

Comment. Section 200.857(h) in the

rule should be revised to remove the

word ‘‘software’’ because this raises

concern that HUD may add features that

are enhancements (provide pictures

from digital camera) but not necessary

to the inspection process and therefore

make the software more costly.

Response. The use of the word

‘‘software’’ is the appropriate term. The

term describes that set of stored

procedures and operating instructions

that allow the data collection device to

function. Inspection data is already in

the software. Digital pictures are not

part of the functionality of the software.

Regulatory Amendments That Adversely

Affect FHA Lenders

Comment. The changes to the

physical inspection process proposed by

the November 1999 rule would be a

violation of § 207.499 and the mortgage

insurance contracts. The change in the

inspection process, as provided in this

rule, is likely to change and increase

costs for lenders in a manner not

contemplated in existing mortgage

insurance contracts. The changes

expand the role and scope if the

inspections performed to date. HUD will

greatly increase the costs by requiring

new computer systems and software and

these new protocols may exceed the

lender’s service income. To control

costs there must be (i) an adequate

number of certified inspectors and

inspection companies to ensure

competition; and (ii) reduced frequency

of inspections for better performing

properties.

Response. The insurance contract

provides for the mortgagee to perform

the inspection pursuant to HUD

requirements and, the insurance

contract has not been adversely affected.

Comment. HUD should add a

provision to this rule that states that the

FHA Commissioner may amend these

regulations but the amendments shall

not adversely affect the interest of a

mortgagee or lender under the contract

of insurance.

Response. HUD declines to add this

provision to the rule. HUD needs the

flexibility to promulgate such

amendments that HUD believes are

necessary to make the housing programs

effective and to fulfill the statutory

obligations and objectives imposed on

HUD for these programs.

Timing of Implementation of the Rule

Comment. Implementation of the rule

should be four months after existing

mortgagees have been provided with

baseline scores and after HUD has

successfully tested the computer system

for scheduling and retrieving

inspections.

Response. To accommodate concerns

in this area, HUD has agreed to perform

all inspections required through

December 31, 2000. This will allow

additional transition and planning time

for lenders.

Comment. Because the parameters

and definitions in the current baseline

inspections are being refined and

revised, and the baseline inspection is

almost complete, it does not make sense

to require new inspections to be

performed during the revision process.

Response. HUD did not require any

new inspections during this period of

baseline inspections.

Comment. The rule should provide

for retroactive application to ensure

owners have fair opportunity to address

scores and be on record that the score

is inappropriate. Otherwise, there may

be injurious results to owners and their

reputation which remains permanently

on the record.

Response. Owners have always had

the opportunity to address scores if they

believe they are inappropriate. Project

Managers will ensure that any

complaint, inquiry or concern is

addressed. Should the Hub/Program

Center Director believe a complaint

about a score or anything else from an

owner is valid, it should be addressed.

HUD Field Office will forward the

complaint to the Office of Asset

Management at HUD Headquarters for

review and action. Should Headquarters

believe additional follow-up is

necessary, Headquarters will forward to

HUD’s Real Estate Assessment Center

for appropriate review and action.

Complaints are posted in ‘‘REMS’’ at the

Field Office level. If forwarded to

Headquarters they are logged and

monitored to ensure the owner receives

a response by Headquarters and/or the

Real Estate Assessment Center.

Entity Responsible for Inspection/

Duplicate Inspection Requirements

Comment. The rule needs to clarify

that for properties with more than one

HUD insured loan, only the first

mortgage lender is required to conduct

the physical inspection with the second

mortgage lender having access to the

inspection. The rule also needs to

clarify that only one mortgage inspects

when there is a first and second

mortgage.

Response. HUD agrees and the final

rule makes these clarifications.

Comment. The rule should specify the

responsible party for Section 8 assisted

properties. The rule does not address

administrative difficulty and

duplication of costs for lenders who

perform inspections, and Section 8

contract administrators. For those

properties with a mortgagee different

from the section 8 contract

administrator, the rule should provide

Federal Register / Vol. 65, No. 237 / Friday, December 8, 2000 / Rules and Regulations 77239

that the Section 8 contract administrator

performs the inspection.

Response. The intent of HUD is to

have inspections performed no more

frequently than annually and that a

single inspection will suffice for all

parties that have a need to perform these

inspections. For the HUD insured

portfolio, the lender will perform all

required inspections; HUD will not

duplicate this effort. Newly appointed

contract administrators will not perform

or arrange for property inspections.

HUD will perform the property

inspection if there is no mortgagee.

Existing contract administrators are

required to inspect annually all units in

a property that they are responsible for

administering. However, the oversight

the contract administrator performs

does not include the HUD physical

inspection protocol: HUD will perform

this inspection. When the contracts are

renewed, the administration will be

turned over to more recently appointed

contract administrators, and at that

time, inspections will be performed

only by HUD.

Comment. HUD needs to clarify how

the Comprehensive Needs Assessment,

which includes a detailed inspection,

interacts with the Uniform Physical

Conditions Standards inspection. HUD

requires owners who request Section 8

renewals to have a Comprehensive

Needs Assessment. Section 8 renewals

may be on a 1 to 5 year basis so the CNA

is used more frequently. HUD needs to

eliminate duplicate requirements.

Response. The Comprehensive Needs

Assessment (CNA) and the Uniform

Physical Condition Standards (UPCS)

are related in that they both address

property assessment but they are

different types of property assessment.

The CNA was designed to estimate the

need for capital improvement over an

extended period into the future. The

CNA uses or can use the UPCS

inspection results as a starting point in

the CNA assessment. The result of the

UPCS inspection, however, is a

snapshot of the property at a specific

point in time. The inspection results are

statistically valid and therefore are

useful as an overall evaluation of

property condition at the point in time

of the inspection. The CNA is not valid,

in the same statistical manner as the

UPCS, but the CNA is an estimate of

physical needs which allows the owner

to make long term plans to accumulate

resources to assure the long term

viability of property. The UPCS

inspection will provide feedback to the

owner and HUD about the CNA

planning process and its validity as time

passes. The two are related and should

be used together but one cannot take the

place of the other.

Comment. There is concern about a

statement in the preamble that states

other HUD offices may inspect for

various purposes. The possibility of

other inspections for other purposes

seems duplicative and wasteful.

Response. This statement refers to

HUD’s statutory and regulatory

requirements under other programs to

monitor compliance with specific

program requirements, which may

include physical inspection, but

generally are directed to other program

requirements. For example, HUD’s

Office of Fair Housing and Equal

Opportunity monitors owner

compliance with requirements for

accessibility and/or appropriate

accommodations for persons with

disabilities. This monitoring, however,

is not a physical inspection to

determine the quality and maintenance

of the accessibility features, but rather

one to determine that the owner has

provided accessibility features and

accommodations where they are

required. The inspection conducted

under HUD’s Uniform Physical

Condition Standards does not monitor

compliance with accessibility

requirements. Although HUD’s physical

inspection process collect specific data

requested by HUD’s Office of Fair

Housing, it is important to note that this

data is not part of the physical condition

scoring process. Therefore, the

examinations of accessibility features

conducted by HUD’s Office of Fair

Housing and Equal Opportunity and

REAC are not duplicative of one

another.

Rulemaking Procedures

Comment. The inspection and scoring

process, as noted in the preamble to the

proposed rule was first introduced in

HUD’s Public Housing Assessment

(PHAS) rule, which was limited to

PHAs. HUD should have specifically

sought comment from tenants in

multifamily housing if it was

considering extending that process to

multifamily housing.

Response. HUD did solicit public

comment from multifamily residents,

owners, and lenders through

publication of the November 26, 1999,

proposed rule. It is the November 1999

rule that proposed a scoring process for

multifamily housing properties, and the

November 1999 proposed rule provided

a 60-day public comment period.

IV. Findings and Certifications

Paperwork Reduction Act Statement

The information collection

requirements contained in this rule have

been submitted to the Office of

Management and Budget under the

Paperwork Reduction Act of 1995 (44

U.S.C. Chapter 35). The information

collection requirements when approved

will be assigned and OMB approval

number and the public will be notified

of this number. An agency may not

conduct or sponsor, and a person is not

required to respond to, a collection of

information unless the collection

displays a valid control number.

Executive Order 12866

The Office of Management and Budget

(OMB) reviewed this rule under

Executive Order 12866, Regulatory

Planning and Review, issued by the

President on September 30, 1993. OMB

determined that this rule is a

‘‘significant regulatory action,’’ as

defined in section 3(f) of the Order

(although not economically significant,

as provided in section 3(f)(1) of the

Order). Any changes made in this rule

subsequent to its submission to OMB

are identified in the docket file, which

is available for public inspection

between 7:30 a.m. and 5:30 p.m.

weekdays in the Office of the Rules

Docket Clerk, Office of General Counsel,

Regulations Division, Room 10276,

Department of Housing and Urban

Development, 451 Seventh Street, SW,

Washington, DC, 20410–8000.

Environmental Impact

A Finding of No Significant Impact

with respect to the environment was

made at the proposed rule stage in

accordance with HUD regulations in 24

CFR part 50 that implement section

102(2)(C) of the National Environmental

Policy Act of 1969 (42 U.S.C. 4223).

That Finding remains applicable to this

final rule and is available for public

inspection between 7:30 a.m. and 5:30

p.m. weekdays in the Office of the Rules

Docket Clerk, Office of General Counsel,

Room 10276, Department of Housing

and Urban Development, 451 Seventh

Street, SW, Washington, DC, 20410–

8000.

Regulatory Flexibility Act

The Secretary, in accordance with the

Regulatory Flexibility Act (5 U.S.C.

605(b)), has reviewed this rule before

publication and by approving it certifies

that this rule is not anticipated to have

a significant economic impact on a

substantial number of small entities. As

stated in HUD’s June 30, 1998, proposed

rule and September 1, 1998, interim rule

77240 Federal Register / Vol. 65, No. 237 / Friday, December 8, 2000 / Rules and Regulations

on uniform physical condition

standards, all HUD housing has been

subject to physical condition standards

and a physical inspection requirement.

There are statutory directives to

maintain HUD housing in a condition

that is decent, safe, and sanitary. The

rules on uniform physical conditions

standards and uniform physical

inspections do not alter these

requirements, nor do they shift

responsibility with respect to who

conducts the physical inspection of the

property. The entities and individuals

responsible for the inspection of HUD

subsidized properties remain

responsible. This rule is a follow-up to

the September 1, 1998, final rule on

uniform physical inspection standards

by establishing an administrative

process by which multifamily housing

properties are analyzed, scored and

ranked. With the exception of exigent

circumstances, the administrative

process, as described in the preamble,

allows for appropriate and reasonable

notice and opportunity for review and

comment, and a reasonable period for

corrective action. With respect to the

physical inspection process itself, in the

preamble to this proposed rule, HUD

reiterated its commitment to provide the

software at no cost to covered entities as

well as the accompanying guidebooks

and to publish a notice that gives

covered entities reasonable notice of

when the software and guidance are

available. With the implementation of

any new or modified program

requirement, HUD intends to provide

guidance to the covered entities,

particularly small entities, to assist them

in understanding the changes being

made.

Executive Order, Federalism

Executive Order 13132 (entitled

‘‘Federalism’’) prohibits, to the extent

practicable and permitted by law, an

agency from promulgating a regulation

that has federalism implications and

either imposes substantial direct

compliance costs on State and local

governments and is not required by

statute, or preempts State law, unless

the relevant requirements of section 6 of

the Executive Order are met. This 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 (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 the private

sector. This proposed rule would not

impose any Federal mandates on any

State, local, or tribal governments, or on

the private sector, within the meaning of

the UMRA.

Catalog of Federal Domestic Assistance

The Catalog of Federal Domestic

Assistance numbers for the programs that

would be affected by this proposed rule are:

14.126—Mortgage—Insurance—Cooperative

Projects (Section 213)

14.129—Mortgage Insurance—Nursing

Homes, Intermediate Care Facilities,

Board and Care Homes and Assisted

Living Facilities (Section 232)

14.134—Mortgage Insurance—Rental

Housing (Section 207)

14.135—Mortgage Insurance—Rental and

Cooperative Housing for Moderate

Income Families and Elderly, Market

Rate Interest (Sections 221(d)(3) and (4))

14.138—Mortgage Insurance—Rental

Housing for Elderly (Section 231)

14.139—Mortgage Insurance—Rental

Housing in Urban Areas (Section 220

Multifamily)

14.157—Supportive Housing for the Elderly

(Section 202)

14.181—Supportive Housing for Persons

with Disabilities (Section 811)

14.856—Lower Income Housing Assistance

Program—Section 8 Moderate

Rehabilitation

List of Subjects

24 CFR Part 5

Administrative practice and

procedure, Aged, Claims, Drug abuse,

Drug traffic control, Grant programs—

housing and community development,

Grant programs—Indians, Individuals

with disabilities, Loan programs—

housing and community development,

Low and moderate income housing,

Mortgage insurance, Pets, Public

housing, Rent subsidies, Reporting and

recordkeeping requirements.

24 CFR Part 200

Administrative practice and

procedure, Claims, Equal employment

opportunity, Fair housing, Home

improvement, Housing standards,

Incorporation by reference, Lead

poisoning, Loan programs—housing and

community development, Minimum

property standards, Mortgage insurance,

Organization and functions

(Government agencies), Penalties,

Reporting and recordkeeping

requirements, Social security,

Unemployment compensation, Wages.

Accordingly, for the reasons stated in

the preamble, title 24 of the CFR is

amended as follows:

PART 5—GENERAL HUD PROGRAM

REQUIREMENTS; WAIVERS

1. The authority citation for 24 CFR

part 5 continues to read as follows:

Authority: 42 U.S.C. 3535(d), unless

otherwise noted.

2. In § 5.701, paragraphs (a) and (b)

are revised to read as follows:

§ 5.701 Applicability.

(a) This subpart applies to housing

assisted under the HUD programs listed

in 24 CFR 200.853(a).

(b) This subpart applies to housing

with mortgages insured or held by HUD,

or housing that is receiving assistance

from HUD, under the programs listed in

24 CFR 200.853(b).

* * * * *

3. Section 5.705 is revised to read as

follows:

§ 5.705 Uniform physical inspection

requirements.

Any entity responsible for conducting

a physical inspection of HUD housing,

to determine compliance with this

subpart, must inspect such HUD

housing annually in accordance with

HUD-prescribed physical inspection

procedures. The inspection must be

conducted annually unless the program

regulations governing the housing

provide otherwise or unless HUD has

provided otherwise by notice.

PART 200—INTRODUCTION TO FHA

PROGRAMS

4. The authority citation for 24 CFR

part 200 continues to read as follows:

Authority: 12 U.S.C. 1701–1715–18; 42

U.S.C. 2535(d).

5. A new subpart P is added to 24 CFR

part 200 to read as follows:

Subpart P—Physical Condition of

Multifamily Properties

Sec.

200.850 Purpose.

200.853 Applicability.

200.855 Physical condition standards and

physical inspection requirements.

200.857 Administrative process for scoring

and ranking the physical condition of

multifamily housing properties.

Subpart P—Physical Condition of

Multifamily Properties

§ 200.850 Purpose.

The purpose of this subpart is to

establish the physical conditions

standards and physical inspection

requirements that are applicable to

certain multifamily housing properties.

§ 200.853 Applicability.

This subpart applies to:

Federal Register / Vol. 65, No. 237 / Friday, December 8, 2000 / Rules and Regulations 77241

(a) Housing assisted by HUD under

the following programs:

(1) All Section 8 project-based

assistance. ‘‘Project-based assistance’’

means Section 8 assistance that is

attached to the structure (see 24 CFR

982.1(b)(1) regarding the distinction

between ‘‘project-based’’ and ‘‘tenantbased’’ assistance);

(2) Section 202 Program of Supportive

Housing for the Elderly (Capital

Advances);

(3) Section 811 Program of Supportive

Housing for Persons with Disabilities

(Capital Advances); and

(4) Section 202 loan program for

projects for the elderly and handicapped

(including 202/8 projects and 202/162

projects).

(b) Housing with mortgages insured or

held by HUD, or housing that is

receiving insurance from HUD, under

the following authorities:

(1) Section 207 of the National

Housing Act (NHA) (12 U.S.C. 1701 et

seq.) (Rental Housing Insurance);

(2) Section 213 of the NHA

(Cooperative Housing Insurance);

(3) Section 220 of the NHA

(Rehabilitation and Neighborhood

Conservation Housing Insurance);

(4) Section 221(d)(3) of the NHA

(Market Interest Rate (MIR) Program);

(5) Section 221(d)(3) and (5) of the

NHA (Below Market Interest Rate

(BMIR) Program);

(6) Section 221(d)(4) of the NHA

(Housing for Moderate Income and

Displaced Families);

(7) Section 231 of the NHA (Housing

for Elderly Persons);

(8) Section 232 of the NHA (Mortgage

Insurance for Nursing Homes,

Intermediate Care Facilities, Assisted

Living Facilities, Board and Care

Homes);

(9) Section 234(d) of the NHA (Rental)

(Mortgage Insurance for

Condominiums);

(10) Section 236 of the NHA (Rental

and Cooperative Housing for Lower

Income Families);

(11) Section 241 of the NHA

(Supplemental Loans for Multifamily

Projects). (Where, however, the primary

mortgage of a Section 241 property is

insured or assisted by HUD under a

program covered in this part, the

coverage by two HUD programs does not

trigger two inspections); and

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

Community Development Act of 1992

(12 U.S.C. 1707 note) (Housing Finance

Agency Risk Sharing Program).

§ 200.855 Physical condition standards

and physical inspection requirements.

(a) Applicable standards and

requirements. The physical condition

standards and physical inspection

requirements in 24 CFR part 5, subpart

G, are applicable to the properties

assisted or insured that are listed in

§ 200.853.

(b) Entity responsible for inspection of

property. The regulations that govern

the programs listed in § 200.853, or

regulatory agreements or contracts,

identify the entity responsible for

conducting the physical inspection of

the property which is HUD, the lender

or the owner. For properties with more

than one HUD insured loan, only the

first mortgage lender is required to

conduct the physical inspection. The

second mortgage lender will be

provided a copy of the physical

inspection report by the first mortgage

lender.

(c) Timing of inspections. (1) For a

property subject to an annual inspection

under this subpart, the inspection shall

be conducted no earlier than 9 months

and no later than 15 months from the

date of the last required inspection. In

no event, however, shall the physical

inspection be conducted after the end of

the calendar year following the one year

anniversary date of the last required

inspection.

(2) For a property subject to an

inspection every two years under this

subpart, the inspection shall be

conducted no earlier than 21 months

and no later than 27 months from the

date of the last required inspection. In

no event, however, shall the physical

inspection be conducted after the end of

the calendar year following the two year

anniversary date of the last required

inspection.

(3) For a property subject to an

inspection every three years under this

subpart, the inspection shall be

conducted no earlier than 33 months

and no later than 39 months from the

date of the last required inspection. In

no event, however, shall the physical

inspection be conducted after the end of

the calendar year following the three

year anniversary date of the last

required inspection.

(4) For a newly endorsed multifamily

property, the first inspection required

under this subpart will be conducted no

earlier than 21 months but not later than

27 months from the date of final

endorsement. In no event, however,

shall the inspection be conducted after

the end of the calendar year following

the two year anniversary date of final

endorsement.

§ 200.857 Administrative process for

scoring and ranking the physical condition

of multifamily housing properties.

(a) Scoring and ranking of the

physical condition of multifamily

housing properties. (1) HUD’s Real

Estate Assessment Center (REAC) will

score and rank the physical condition of

certain multifamily housing insured

properties listed in § 200.853 in

accordance with the procedures

described in this section. The physical

condition inspection of the property,

upon which REAC bases its score and

ranking, is conducted by the responsible

entity in accordance with § 200.855.

(2) Depending upon the results of its

physical condition inspection, a

multifamily housing property will be

assigned one of three designations—

standard 1 performing, standard 2

performing and standard 3 performing—

in accordance with the ranking process

described in paragraph (b) of this

section.

(b) Methodology for Ranking. (1)

Multifamily housing properties will be

ranked in accordance with the

methodology provided in this paragraph

(b). Multifamily housing properties are

scored on the basis of a 100 point scale.

Because scores may include fractions, a

score that includes a fraction below one

half point will be rounded to the next

lower full point and a score that

includes a fraction of one half point or

higher will be rounded to the next

higher full point (e.g., 89.4 will be

rounded to 89, 89.5 will be rounded to

90).

(i) Standard 1 Performing Property. If

a property receives a score of 90 points

or higher on its physical condition

inspection, the property will be

designated a standard 1 performing

property. Properties designated as

standard 1 performing properties will be

required to undergo a physical

inspection once every three (3) years.

(ii) Standard 2 Performing Property. If

a property receives a score of 80 points

or higher but less than 90 on its physical

condition inspection, the property will

be designated a standard 2 performing

property. Properties designated as

standard 2 performing properties will be

required to undergo a physical

inspection once every two (2) years.

(iii) Standard 3 Performing Property.

If a property receives a score of less than

80 points, the property will be

designated a standard 3 performing

property. Properties designated as

standard 3 performing properties will

continue to undergo an annual physical

inspection as currently required under

covered HUD programs.

(2) Owners of multifamily housing

properties scoring in a standard 1 or

standard 2 range which have been cited

by the REAC as having a Exigent Health

and Safety (EHS) deficiency(s) must

resolve the deficiency(s), as required by

paragraph (c)(2) of this section, to be

77242 Federal Register / Vol. 65, No. 237 / Friday, December 8, 2000 / Rules and Regulations

classified as standard 1 and standard 2

properties.

(3) Regardless of the performance

designation assigned to an owner’s

property, an owner is obligated to

maintain its property in accordance

with HUD’s uniform physical condition

standards as required by 24 CFR part 5,

subpart G, the Regulatory Agreement

and/or the Housing Assistance Payment

(HAP) Contract. Good management

principles require an owner to conduct

routine inspections of its projects,

develop improvement plans, and again,

maintain its property to meet the

standard of decent, safe, sanitary and in

good repair.

(c) Owner’s review of physical

inspection report and identification of

objectively verifiable and material error.

(1) Upon completion of a physical

inspection of a multifamily housing

property, the REAC will provide the

owner or owner’s representative, on the

date of the physical inspection, notice of

any items classified as EHS deficiencies.

REAC also will provide the owner with

the entire physical inspection report

(electronically through the internet or

by mail approximately 10 working days

from the date of the report), which

provides the physical inspection results

and other information relevant to the

inspection, including any items

classified as EHS deficiencies and

already provided to the owner, on the

date of the inspection (EHS deficiencies

are relayed by the inspector on the date

of the inspection).

(2) The owner must carefully review

the physical inspection report,

particularly those items classified as

EHS. The owner is also responsible for

conducting its own survey of the total

project based on the REAC’s physical

inspection findings. The owner must

mitigate all EHS items immediately, and

the owner must file a written report

with the applicable Multifamily Hub

Director within 3 business days of the

date of the inspection, which is the date

the owner was provided with the EHS

notice. The report filed by the owner

must provide a certification and

reasonable evidence that the EHS items

have been resolved.

(3) If, following review of the physical

inspection results and score, the owner

reasonably believes that an objectively

verifiable and material error (or errors)

occurred in the inspection, which, if

corrected, will result in a significant

improvement in the property’s overall

score (‘‘significant improvement’’ is

defined in paragraph (d)(4) of this

section), the owner may request a

technical review within the following

period, as applicable:

(i) 15 calendar days from the date the

owner receives the physical condition

score from REAC if the results and score

are electronically transmitted via the

Internet to the owner; or

(ii) 30 calendar days from the date the

owner receives the physical condition

score from REAC if the results and score

are transmitted to the owner by hard

copy by certified mail.

(d) Technical review of physical

inspection results. A request for a

technical review of physical inspection

results must be submitted in writing to

the Director of the Real Estate

Assessment Center and must be

received by the REAC no later than the

15th calendar day or 30th calendar day,

as applicable under paragraph (c)(3) of

this section, following submission of the

physical inspection report to the owner

as provided in paragraph (c)(1) of this

section.

(1) Request for technical review. The

request must be accompanied by the

owner’s reasonable evidence that an

objectively verifiable and material error

(or errors) occurred which if corrected

will result in a significant improvement

in the overall score of the owner’s

property. A technical review of physical

inspection results will not be conducted

based on conditions that were corrected

subsequent to the inspection. Upon

receipt of this request from the owner,

the REAC will review the physical

inspection and the owner’s evidence. If

the REAC’s review determines that an

objectively verifiable and material error

(or errors) has been documented and

that it is likely to result in a significant

improvement in the property’s overall

score, the REAC will take one or a

combination of the following actions:

undertake a new inspection; correct the

original inspection; or issue a new

physical condition score.

(2) Burden of proof that error

occurred rests with owner. The burden

of proof rests with the owner to

demonstrate that an objectively

verifiable and material error (or errors)

occurred in the REAC’s inspection

through submission of evidence, which

if corrected will result in a significant

improvement in the property’s overall

score. To support its request for a

technical review of the physical

inspection results, the owner may

submit photographic evidence, written

material from an objective source such

as a local fire marshal or building code

official, or other similar evidence.

(3) Material errors. An objectively

verifiable material error must be present

to allow for a technical review of

physical inspection results. Material

errors are those that exhibit specific

characteristics and meet specific

thresholds. The three types of material

errors are as follows.

(i) Building data error. A building

data error occurs if the inspection

includes the wrong building or a

building that was not owned by the

property, including common or site

areas that were not a part of the

property. Incorrect building data that

does not affect the score, such as the

address, building name, year built, etc.,

would not be considered material, but is

of great interest to HUD and will be

corrected upon notice to the REAC.

(ii) Unit count error. A unit count

error occurs if the total number of units

considered in scoring is incorrect. Since

scoring uses total units, the REAC will

examine instances where the participant

can provide evidence that the total units

used is incorrect.

(iii) A non-existent deficiency error. A

non-existent deficiency error occurs if

the inspection cites a deficiency that

does not exist.

(4) Significant improvement.

Significant improvement refers to the

correction of a material error, asserted

by the owner, which causes the score for

the owner’s property to cross an

administratively significant threshold

(for example, the property would be

redesignated from standard 3

performing to standard 2 performing or

from standard 2 performing to standard

1 performing), or to result in an increase

of 10 points or more.

(5) Determining whether material

error occurred and what action is

warranted. Upon receipt of the owner’s

request for technical review of a

property’s physical inspection results,

the REAC will evaluate the owner’s

property file and the evidence provided

by the owner that an objectively

verifiable and material error occurred

which, if corrected, would result in a

significant improvement in the

property’s overall score. If the REAC’s

evaluation determines that an

objectively verifiable and material error

(or errors) has been reasonably

documented by the owner and if

corrected would result in a significant

improvement in the property’s overall

score, then the REAC shall take one or

a combination of the following actions:

(i) Undertake a new inspection;

(ii) Correct the inspection report; or

(iii) Issue a new physical condition

score.

(6) Responsibility for the cost of a new

inspection. If a new inspection is

undertaken by the REAC and the new

inspection score results in a significant

improvement in the property’s overall

score, then HUD shall bear the expense

of the new inspection. If no significant

improvement occurs, then the owner

Federal Register / Vol. 65, No. 237 / Friday, December 8, 2000 / Rules and Regulations 77243

must bear the expense of the new

inspection. The inspection cost of a new

inspection, if paid by the owner, is not

a valid project operating expense. The

new inspection score will be considered

the final score.

(e) Adjustment of physical condition

score based on considerations other

than technical review and reinspection.

(1) Under certain circumstances, HUD

may find it appropriate to review the

results of a physical inspection which

are anomalous or have an incorrect

result due to facts and circumstances

affecting the inspected property which

are not reflected in the inspection or

reflected inappropriately in the

inspection. These circumstances

include, but are not necessarily limited

to, inconsistencies between local code

requirements and the HUD physical

inspection protocol; conditions which

are permitted by variance or license or

which are preexisting physical features

non-conformities and are inconsistent

with the HUD physical condition

protocol; or cases where the owner has

been scored for elements (e.g., roads,

sidewalks, mail boxes, resident owned

appliances, etc.) that it does not own

and is not responsible for maintaining.

(2) To seek a score adjustment on the

basis of these circumstances as provided

in paragraph (e) of this section, the

owner must submit a request for an

adjustment to REAC with appropriate

proof of the circumstances that resulted

in the incorrect physical conditions

results. This process may result in a

reinspection and/or rescoring of the

inspection after review and approval of

the owner’s submission of appropriate

proof of the anomalous or inappropriate

application.

(3) An owner may submit the request

for this adjustment to REAC either prior

to or after the physical inspection has

been concluded. If the owner submits a

request for adjustment after the physical

inspection has been concluded, the

owner must submit its request to REAC

within 45 days following the

submission of the physical inspection

report, as provided in paragraph (c)(1) of

this section. HUD may, but is not

required to review a request made after

this period has expired.

(4) This adjustment process, provided

in this paragraph (g), may result in a

reinspection and/or rescoring of the

inspection after review and approval of

the owner’s submission of appropriate

proof of the anomalous or inappropriate

application.

(f) Issuance of final score and

publication of score. (1) The physical

condition score of the property is the

final score if the owner files no request

for technical review, as provided in

paragraph (c) of this section, or for other

adjustment of the physical condition

score, as provided in paragraph (e) of

this section. If the owner files a request

for technical review or score

adjustments in accordance with

paragraphs (c) and (e) of this section, the

final physical condition score is the

score issued by HUD after any

adjustments are determined necessary

and made by HUD at the conclusion of

these processes.

(2) HUD will make public the final

scores of the owners through posting on

HUD’s internet site, or through Federal

Register publication or other

appropriate means.

(g) Owner’s responsibility to notify

residents of inspection; and availability

of documents to residents.

(1) Notification to residents. An

owner must notify its residents of any

planned physical inspections of their

units or the housing development

generally.

(2) Availability of documents for

review. Once the technical review and

database adjustment periods have

expired, as provided in paragraphs (d)

and (e) of this section, respectively, the

owner must make its physical

inspection report and all related

documents available to its residents

during regular business hours upon

reasonable request for review and

copying. Related documents include the

owner’s survey plan, plan of correction,

certification and related

correspondence.

(i) Once the owner’s final physical

condition score is issued and published,

the owner must make any additional

information, such as the results of any

reinspection, appeal requests, available

for review and copying by its residents

upon reasonable request during regular

business hours.

(ii) The owner must maintain the

documents related to the physical

inspection of the property, as described

in this paragraph (g)(2), available for

review by residents for a period of 60

days from the date of submission to the

owner of the physical condition score

for the property in which the residents

reside.

(3) The owner must post a notice to

the residents in the owner’s

management office and on any bulletin

boards in all common areas that advises

residents of the availability of the

materials described in paragraphs (g)(2)

of this section. The notice should

include the name, address and

telephone number of the HUD Project

Manager.

(4) Residents are encouraged to

comment on this information provided

by the owners and submit any

comments directly to the applicable

Field Office. Should residents discover

the owner provided HUD with a false

certification during the review they are

encouraged to notify the Hub or

Program Center where appropriate

inquiry and action will be taken.

(h) Administrative review of

properties. The file of a multifamily

property that receives a score of 30

points or less on its physical condition

inspection will be referred to HUD’s

Departmental Enforcement Center (DEC)

for evaluation. The files of any of the

multifamily housing properties may be

submitted to the DEC or to the

appropriate HUD Multifamily Hub

Director (MFD) for evaluation, or both,

at the discretion of the Office of

Housing.

(1) Notification to owner of

submission of property file to the MFD

and DEC. The Department will provide

for notification to the owner that the file

on the owner’s property is being

submitted to the MFD and/or the DEC

for evaluation. The notification will be

provided at the time the REAC issues

the physical inspection report to the

owner or at such other time as a referral

occurs.

(2) 30–Day period for owner to

provide the DEC with supporting and

relevant information and

documentation. The owner has 30

calendar days, from the date of the

REAC notification to the owner, to

provide comments, proposals, or any

other information to the DEC which will

assist the MFD and DEC in conducting

a comprehensive evaluation of the

property. A proposal provided by an

owner may include the owner’s plan to

correct deficiencies (corrective action

plan). During the 30-day response time

available to the owner, the DEC may

encourage the owner to submit a

corrective action plan. The corrective

action plan, if timely submitted during

the 30-day period (whether on the

owner’s initiative or at the request of the

DEC), may serve as additional

information for the DEC to consider in

determining appropriate action to take

at the conclusion of the evaluation

period. If not submitted during the 30-

day response time, a corrective action

plan may be required of the owner at the

conclusion of the DEC’s evaluation of

the property.

(3) Evaluation of the property. During

the evaluation period, the DEC will

perform an analysis of the multifamily

housing property, which may include

input from tenants, HUD multifamily

officials, elected officials, and others as

may be appropriate. Although the MFD

will assist with the evaluation, for

insured mortgages, the DEC will have

77244 Federal Register / Vol. 65, No. 237 / Friday, December 8, 2000 / Rules and Regulations

primary responsibility for the

conclusion of the evaluation of the

property after taking into consideration

the input of interested parties as

described in this paragraph (h)(2). The

DEC’s evaluation may include a site

visit to the owner’s property.

(4) Continuing responsibilities of HUD

Multifamily Program Offices and

Mortgagee. During the period of DEC

evaluation, HUD’s multifamily program

offices continue to be responsible for

routine asset management tasks on

properties and all servicing actions (e.g.,

rent increase decisions, releases from

reserve account approvals). In addition,

during this period of evaluation, the

mortgagee shall continue to carry out its

duties and responsibilities with respect

to the mortgage.

(i) Enforcement action. If, at the

conclusion of the evaluation period, the

DEC determines that enforcement action

is appropriate, the DEC will provide

notification to the owner of the DEC’s

decision to formally accept the property

for enforcement purposes.

(1) DEC Owner Compliance Plan. (i)

After notification to the owner of the

DEC’s decision, the DEC will produce a

proposed action plan (DEC Compliance

Plan), the purpose of which is to

improve the physical condition of the

owner’s property, and correct any other

known violations by the owner of its

legal obligations. The DEC Compliance

Plan will describe:

(A) The actions that will be required

of the owner to correct, mitigate or

eliminate identified property

deficiencies, problems, hazards, and/or

correct any other known violations by

the owner;

(B) The period of time within which

these actions must be completed; and

(C) The compliance responsibilities of

the owner.

(ii) The DEC Compliance Plan will be

submitted to the MFD for review and

concurrence. If the MFD does not

concur, the DEC Compliance Plan will

be submitted to the Deputy Assistant

Secretary for Housing and the Deputy

Director of the DEC for review and

concurrence. If the DEC Compliance

Plan remains unapproved, a final

decision on the plan will be made by

HUD’s Deputy Secretary in consultation

with the General Counsel, the Assistant

Secretary for Housing, and the Director

of the DEC.

(iii) Following submission of the DEC

Compliance Plan to the owner, the

owner will be provided a period of 30

calendar days to review and accept the

DEC Compliance Plan. If the owner

agrees to comply with the DEC

Compliance Plan, the plan will be

forwarded to the appropriate

Multifamily Office for implementation

and monitoring of completion of the

plan’s requirements.

(2) Counter compliance plan proposal

by owner. The owner may submit an

acceptable counter proposal to the DEC

Compliance Plan. An owner’s counter

proposal to a DEC Compliance Plan

must be submitted no later than the 30th

day following submission of the DEC

Compliance Plan to the owner. The

DEC, in coordination with the MFD,

may enter into discussions with the

owner to achieve agreement to a revised

DEC Compliance Plan. If the owner and

the DEC agree on a revised DEC

Compliance Plan, the revised plan will

be forwarded to the appropriate

Multifamily Office for implementation

and monitoring of completion of the

plan’s requirements.

(3) Non-cooperation and Noncompliance by owner. If at the

conclusion of the 30th calendar day

following submission of the DEC

Compliance Plan to the owner, the DEC

receives no response from the owner, or

the owner refuses to accept the DEC

Compliance Plan, or to present a

counter compliance plan proposal, or if

the owner accepts the DEC Compliance

Plan or revised DEC Compliance Plan,

but refuses to take the actions required

of the owner in the plan, the DEC may

take appropriate enforcement action.

(4) No limitation on existing

enforcement authority. The

administrative process provided in this

section does not prohibit the Office of

Housing, the DEC, or HUD generally, to

take whatever action may be necessary

when necessary (notwithstanding the

commencement of this process), as

authorized under existing statutes,

regulations, contracts or other

documents, to protect HUD’s financial

interests in multifamily properties and

to protect the residents of these

properties.

(j) Limitations on material alteration

of physical inspection software. HUD

will not materially alter the physical

inspection requirements in a manner

which would materially increase the

cost of performing the inspection.

Dated: December 4, 2000.

William C. Apgar,

Assistant Secretary for Housing—Federal

Housing Commissioner.

[FR Doc. 00–31306 Filed 12–7–00; 8:45 am]

BILLING CODE 4210–27–P