Document Headings

                    Document headings vary by document type but may contain                    the following:                  
                -                       the agency or agencies that issued and signed a document                    
                -                       the number of the CFR title and the number of each part                      the document amends, proposes to amend, or is directly                      related to                    
                -                       the agency docket number / agency internal file number                    
                -                       the RIN which identifies each regulatory action listed in                      the Unified Agenda of Federal Regulatory and Deregulatory                      Actions                    

                    See the                                          Document Drafting Handbook                                        for more details.                  

###### Department of Housing and Urban Development

          - 24 CFR Part 200
          - [Docket No. FR-6423-F-02]
          - RIN 2502-AJ72

# AGENCY:

Office of the Assistant Secretary for Housing—Federal Housing Commissioner, Department of Housing and Urban Development (HUD).

# ACTION:

Final rule.

# SUMMARY:

When funds provided by a mortgagor to a mortgagee are not fully disbursed with the initial advance of the insured mortgage proceeds, this final rule permits mortgagees to disburse up to 1 percent of the mortgage amount initially endorsed for insurance before requiring that the funds provided by the mortgagor be disbursed in full. This change to HUD's requirements removes unusual and burdensome mortgage servicing practices that may result from pooling mortgages into mortgage-backed securities guaranteed by the Government National Mortgage Association prior to the funds provided by the mortgagor being disbursed in full. This final rule adopts HUD's August 6, 2024, proposed rule with only minor, non-substantive revisions.

# DATES:

Effective January 13, 2025.

# FOR FURTHER INFORMATION CONTACT:

                        Margaret Lawrence, Deputy Director, Office of Multifamily Production, Department of Housing and Urban Development, 451 7th Street SW, Room 6134, Washington, DC 20410, telephone 202-431-7397 (this is not a toll-free number). HUD welcomes and is prepared to receive calls from individuals who are deaf or hard of hearing, as well as individuals with speech or communication disabilities. To learn more about how to make an accessible telephone call, please visit                         *https://www.fcc.gov/​consumers/​guides/​telecommunications-relay-service-trs.*

# SUPPLEMENTARY INFORMATION:

## I. Background

### 24 CFR 200.54 and Ginnie Mae Guaranteed Mortgage-Backed Securities

                    Mortgagees seeking to originate a Federal Housing Administration (FHA)-insured mortgage regulated pursuant to 24 CFR part 200, subpart A, must comply with the project completion funding requirements in 24 CFR 200.54. These requirements provide that a mortgagor must deposit funds with its mortgagee that are sufficient, when added to the proceeds from the FHA-insured mortgage, to assure completion of planned multifamily or healthcare facility project work and to pay the initial service charge, carrying charges, and legal and organization expenses incident to the construction of the project. Typically, 24 CFR 200.54(b) requires that the funds deposited by the mortgagor with the mortgagee (mortgagor-provided funds) must be disbursed in full for project work, material, and incidental charges and expenses (collectively, “project-related expenses”) before the mortgagee may disburse any mortgage proceeds. HUD requires that mortgagees disburse the mortgagor-provided funds in full before disbursing any mortgage proceeds as a basic risk measure.[1] 

                    For most mortgages regulated pursuant to 24 CFR part 200, subpart A, the mortgagor-provided funds are disbursed in full to pay for project-related expenses with the initial advance of the insured mortgage proceeds at the time the insured mortgage is endorsed. For certain mortgages, however, the amount of mortgagor-provided funds exceeds the amount of project-related expenses due at the time the insured mortgage is endorsed. Where the mortgagor-provided funds are not fully disbursed at the time the insured mortgage is endorsed, the mortgagor-provided funds are fully disbursed through subsequent disbursements by the mortgagee, usually with the mortgagor-provided funds                           ( print page 100740)                        being disbursed within two months after the insured mortgage is endorsed.                

                    Given that 24 CFR 200.54(b) does not typically permit insured mortgage proceeds to be disbursed until the mortgagee disburses all mortgagor-provided funds, if the mortgagor-provided funds are not fully disbursed at the time the insured mortgage is endorsed, there may be challenges in pooling the mortgage into a mortgage-backed security (MBS) guaranteed by the Government National Mortgage Association (Ginnie Mae) without conflicting with 24 CFR 200.54(b), possibly creating financial difficulties for the mortgagor.[2]                                          As such, for an insured mortgage to be pooled into a Ginnie Mae guaranteed MBS, the insured mortgage proceeds must be permitted to be disbursed.                

This financial difficulty created by 24 CFR 200.54(b) typically only exists for a short period of usually no longer than two months after the endorsement of the FHA-insured mortgage, by which time the mortgagor-provided funds are usually fully disbursed. During the short period, the mortgagee must implement unusual and burdensome mortgage servicing practices to maintain compliance with 24 CFR 200.54(b). If a mortgagee is unable to pool an insured mortgage into a Ginnie Mae guaranteed MBS at endorsement, the mortgagee might never be able to securitize the insured mortgage and might fail to meet contractually required delivery dates between the mortgagee and investor. This could potentially lead to costly investor compensation fees. The mortgagee may also experience issues relating to its financial liquidity cycle. When many insured mortgages are unable to be pooled into Ginnie Mae guaranteed MBSs at the time the insured mortgages are endorsed, cascading issues for the broader mortgage market can occur. These can include reducing the overall liquidity of the mortgage market and increasing the cost on mortgagors to borrow funds, which reduces the availability of housing and ultimately harms HUD's mission to create strong, sustainable, inclusive communities and affordable homes for all.

### Partial Regulatory Waiver of 24 CFR 200.54(b)

                    HUD has recently addressed this issue with the requirements in 24 CFR 200.54(b) for mortgages insured under National Housing Act sections 213 and 221(d)(4) by issuing a partial regulatory waiver of the requirements of 24 CFR 200.54(b) (Partial Waiver of 24 CFR 200.54(b)).[3]                                          The Partial Waiver of 24 CFR 200.54(b) partially waives the requirement in 24 CFR 200.54(b) that mortgagor-provided funds “must be disbursed in full” for project-related expenses before any disbursement of funds from the insured mortgage. Instead, the Partial Waiver of 24 CFR 200.54(b) permits a mortgagee to disburse funds from the insured mortgage in an amount up to one-half percent (0.5%) of the initially endorsed mortgage amount. The Partial Waiver of 24 CFR 200.54(b) allows mortgagees to comply with FHA's requirements and pool insured mortgages into Ginnie Mae guaranteed MBSs.                

## II. The Proposed Rule

                    On August 6, 2024, HUD published for public comment a proposed rule entitled “Disbursing Multifamily Mortgage Proceeds: Permitting Mortgagees to Disburse Mortgage Proceeds with Mortgagor-Provided Funds.” [4]                                          The proposed rule proposed to add an exception to the requirement in 24 CFR 200.54(b) that the funds provided by the mortgagor must be disbursed in full before the disbursement of any proceeds from the insured mortgage. The proposed rule also proposed to make non-substantive terminology and organizational edits to 24 CFR 200.54 that would not affect any other requirements within the section.                

The exception proposed to be added to 24 CFR 200.54(b) would permit mortgagees, where the funds provided by the mortgagor are not fully disbursed with the initial advance of the insured mortgage proceeds, to disburse up to 1 percent of the mortgage amount initially endorsed for insurance before requiring that the funds provided by the mortgagor be disbursed in full. This proposed exception would permit that a mortgagee could disburse mortgage proceeds at the time the mortgage is initially endorsed for insurance up to a maximum of 1 percent of the initially endorsed mortgage amount. Alternatively, a mortgagee could choose to disburse mortgage proceeds in any amount on a monthly basis, whether consecutive or not, up to a combined maximum of 1 percent of the initially endorsed insured mortgage amount until the mortgagor-provided funds are fully disbursed.

## III. This Final Rule

After reviewing and considering the public comments received during the proposed rule stage of this rulemaking, HUD is publishing this final rule with only minor, non-substantive revisions from the proposed rule. HUD believes that the added exception to 24 CFR 200.54(b) will help keep FHA-insured mortgage products competitive in economic environments with rising interest rates and/or multi-year high interest rates, especially for new construction projects, where a higher proportion of mortgage proceeds are constrained by FHA's debt service coverage ratio requirements. In an economic environment with rising and high interest rates, mortgagors must deposit additional funds with their mortgagee, making it more likely that the mortgagor-provided funds will not be fully disbursed during the initial advance of the insured mortgage proceeds. HUD believes that this added exception will help ensure that interest rates for FHA-insured mortgages remain competitive and ensure the liquidity of FHA-insured mortgages on the secondary mortgage market.

## IV. Public Comments

This public comments section contains a summary of the public comments that HUD received in response to the proposed rule.

*HUD should allow mortgage proceeds to be disbursed using a proportional debt to equity amount without requiring that mortgagor-proved funds first be fully exhausted.*

A commenter supported the proposed rule as a step in the right direction but suggested that HUD go further. Other commenters supported HUD's goal to allow mortgagees to pool mortgages into Ginnie Mae guaranteed MBSs prior to mortgagor-provided funds being disbursed in full but believed the rule as proposed would be ineffective.

                    A commenter stated that HUD's proposed rule should be changed to allow mortgage proceeds to be drawn for HUD-covered multifamily loans proportionate to the proportion of the amount of debt                     *i.e.,*                     the loan amount, to equity,                     *i.e.,*                     the mortgagor-provided funds, in the HUD transaction. As the commenter provided by example, a loan that has a 60 percent loan to cost ratio would, at each draw, draw 60 percent from the Ginnie Mae MBS and 40% from borrower equity.                

                    Another commenter, similarly, suggested that HUD allow up to 35 percent of the insured loan proceeds to be drawn at initial endorsement, and then allow subsequent draws in                           ( print page 100741)                        proportion to the mortgagor's remaining funds. This commenter stated that their recommendation would significantly lower insured loan interest rates.                

Commenters pointed to the problems associated with higher interest rates for construction loans and stated that their recommendations would address the issue of investors requiring higher interest rates to hedge variable interest rates while waiting for issuance.

A commenter stated that the multiple Ginnie Mae guaranteed MBSs issued and delivered in various amounts to a Ginnie Mae investor over the length of the construction period, typically 18 to 24 months, are delivered to the investor in an amount equal to the mortgage proceeds disbursed and, in months where no mortgage proceeds can be disbursed, no Ginnie Mae MBS is delivered. The commenter stated concerns that under HUD's proposed rule, in situations where mortgagor-provided funds are not fully disbursed in the first installment that the first Ginnie Mae guaranteed MBS delivery can be no more than 1 percent of the mortgage, and no subsequent Ginnie Mae guaranteed MBS deliveries will occur until borrower equity is exhausted. The commenter noted that it is common in today's lending environment that borrower equity makes up 30 percent to 40 percent of the total sources of funds in a construction loan. The commenter described that all of this means that investors must price into the agreed interest rate the cost of waiting 7 to 14, or more, months for Ginnie Mae guaranteed MBS issuance in any substantive amount. The commenter stated that this delay can increase interest rates by approximately 10 to 50 basis points.

Another commenter specifically noted that for Midwestern and smaller community projects, it can take up to a year before any insured loan proceeds are disbursed in a meaningful amount because the amount of required equity can be higher and take longer to exhaust. The commenter noted that because of this, the increase in interest rates in these communities can be anywhere between 0.15 and 0.40 percentage points.

Commenters stated that their suggested changes represented a low risk to HUD, and that their suggestions do not increase the risk beyond the risk level already accepted under the proposed rule. A commenter noted that FHA-approved lenders are required to hold all the mortgagor's required funds in escrow and to hold the initial operating deficit and working capital escrow fund either in cash or an irrevocable letter of credit. Another commenter noted that if a HUD-insured project defaulted during construction, HUD and the lender, under HUD forms HUD-92441M (building-loan agreement) and HUD-94000M (security instrument), have the right to use mortgagor-provided funds, which are pledged collateral, to offset any losses or claims on disbursed loan proceeds. The commenter provided the example of a $10 million project with 40 percent mortgagor-provided funds and 60 percent mortgage-proceeds, which the commenter stated that the proposed rule would allow for a $60,000 Ginnie Mae draw before the mortgagor began to draw down equity. Under the commenter's suggestion, the cash equity balance would stay higher for a longer period, meaning at the point where $3 million had been drawn from Ginnie Mae, $2 million would remain in cash equity as collateral.

A commenter noted that FHA lenders can model the projected interest cost by preparing a draw schedule based on the projected draw down of insured loan proceeds. The commenter noted an additional 10 percent cushion could be added to the estimate to be reasonably confident there is sufficient capitalized interest carried in the project's budget.

Commenters also stated that HUD has extensive experience with proportional debt to equity construction loan disbursements through the Low-Income Housing Credit (LIHTC) exception to HUD's full mortgagor-provided funds disbursement requirement. Commenters stated that HUD has allowed this LIHTC exception without increased risk to HUD and its mortgage insurance fund. Commenters stated that allowing proportional debt to equity disbursements for non-LIHTC projects, under their suggested change, would be less risky because LIHTC equity and bridge loan proceeds are not funded in full nor are they held by the lender like the funds are in non-LIHTC construction projects to which this proposed change would apply.

*HUD Response:*                     HUD disagrees that mortgage proceeds should be disbursed to mortgagors in proportional debt to equity amounts. Through this rulemaking, HUD's is maintaining the intent of the existing regulation, which is that a borrower's equity should be invested ahead of debt. With a borrower's equity at risk upfront, the owners are properly incentivized to prudently manage and complete the project.                

The regulation change made through this rulemaking is a technical, limited modification to support the timely issuance of Ginnie Mae guaranteed MBSs, while preserving the risk mitigation principle of upfront equity investment. Under the existing 24 CFR 200.54(b), a strict requirement that 100 percent of all borrower equity must be disbursed can delay the initial issuance of a Ginnie Mae guaranteed MBS and potentially disrupt the mortgage-banking liquidity cycle. HUD has determined that 1 percent of the mortgage amount can be drawn before borrower's equity is disbursed in full, without impairing a borrower's incentive to protect its equity investment. HUD determined this, in part, by its experience processing mortgages and observing mortgagee performance while relying on the Partial Waiver of 24 CFR 200.54(b).

*HUD should also allow disbursements of up to $25,000 per month in mortgage proceeds.*

A commenter suggested several technical edits to the proposed regulatory text of 24 CFR 200.54(b)(2). The commenter suggested that HUD allow the greater of 1 percent of the mortgagee funds or $25,000 monthly in mortgage proceeds. The commenter noted that drawdowns are made monthly, and HUD's proposed rule appeared to only apply to the initial draw.

*HUD Response:*                     HUD disagrees that the regulation should allow the greater of 1 percent of the mortgagee funds or $25,000 monthly in mortgage proceeds. In very infrequent cases, certain small loan balance multifamily loans may not achieve the investors' preferred $25,000 minimum denomination under a 1 percent threshold; however, modifying the regulation to optimize investor preferences for the infrequently occurring nuances of small loan sizes is beyond the scope of this regulation change.                

*HUD should adjust its permitted disbursement amount through**Federal Register**notice.*

                    A commenter suggested that HUD create a new 24 CFR 200.54(b)(3) that allows HUD to adjust the permitted disbursement amount through the publication of a notice in the                     **Federal Register**                    . The commenter stated that the                     **Federal Register**                     notice should provide a 30 day public comment period prior to the finalizing of the adjusted disbursement amount that was announced in the suggested notice. The commenter believed that a 1 percent disbursement amount may not be enough and thought HUD might decide to increase the percentage in the future. The commenter noted that adjusting the permitted disbursement amount through a                     **Federal Register**                     notice is similar to the strategy used for HUD's mortgage insurance premium regulations.                          ( print page 100742)    

*HUD Response:*                     HUD disagrees that 24 CFR 200.54(b) needs periodic updates. Periodically adjusting the 1 percent threshold to a different percentage through a                     **Federal Register**                     notice is unnecessary because HUD has determined that it is sufficient to allow up to the 1 percent threshold amount can be drawn before a borrower's equity is disbursed in full without impairing borrower incentive to protect its equity investment.                

*HUD's proposed rule goes too far by allowing even 1 percent of mortgage proceeds to be disbursed before requiring the full disbursement of mortgagor-provided funds.*

A commenter disagreed with HUD's proposed rule by saying that HUD's proposed rule goes too far by allowing even 1 percent of mortgagee proceeds to be disbursed before requiring the full disbursement of mortgagor-provided funds. The commenter stated that requiring full disbursement of mortgagor-provided funds before mortgage proceeds is a crucial risk mitigation measure to prevent financial mismanagement and delays in projects. The commenter stated that HUD's proposed rule could introduce instability into the MBS market because, as is currently required, by first requiring the full disbursement of mortgagor-provided funds ensures the financial soundness of the securities issued. The commenter also suggested that HUD's proposed rule could negatively impact small businesses by creating unpredictable financial environments, which would cause business uncertainties and cash-flow issues.

*HUD Response:*                     HUD disagrees that a 1 percent disbursement of mortgage proceeds prior to full disbursement of mortgagor-provided funds materially impairs the over-arching risk mitigation set forth by HUD's regulations. HUD has determined that 1 percent of the mortgage amount can be drawn before a borrower's equity is disbursed in full without impairing borrower incentive to protect its equity investment. HUD determined this, in part, by its experience processing mortgages and observing mortgagee performance while relying on the Partial Waiver of 24 CFR 200.54(b).                

## V. Findings and Certifications

### Regulatory Review—Executive Orders 12866, 13563, and 14094

Pursuant to Executive Order 12866 (Regulatory Planning and Review), a determination must be made whether a regulatory action is significant and, therefore, subject to review by the Office of Management and Budget (OMB) in accordance with the requirements of the Executive Order. Executive Order 13563 (Improving Regulations and Regulatory Review) emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. The order also directs Executive agencies to analyze regulations that are “outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned.” Executive Order 13563 further directs that, where relevant, feasible, and consistent with regulatory objectives, and to the extent permitted by law, agencies are to identify and consider regulatory approaches that reduce burdens and maintain flexibility and freedom of choice for the public. Executive Order 14094 (Modernizing Regulatory Review) amends section 3(f) of Executive Order 12866, among other things.

The only substantive regulatory change made through this rulemaking is to permit mortgagees, where the funds provided by the mortgagor are not fully disbursed with the initial advance of the insured mortgage proceeds, to disburse up to 1 percent of the mortgage amount initially endorsed for insurance before requiring that the funds provided by the mortgagor be disbursed in full. This rulemaking was determined to not be a “significant regulatory action” as defined in section 3(f) of Executive Order 12866, as amended by Executive Order 14094, and is not an economically significant regulatory action and therefore was not subject to OMB review.

### Regulatory Flexibility Act

                    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601*et seq.*) generally requires an agency to conduct a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements, unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. The changes in this rulemaking are limited to permitting mortgagees, where the funds provided by the mortgagor are not fully disbursed with the initial advance of the insured mortgage proceeds, to disburse up to 1 percent of the mortgage amount initially endorsed for insurance before requiring that the funds provided by the mortgagor be disbursed in full. This change will not have a significant economic impact on a substantial number of small entities. Accordingly, the undersigned certifies that this final rule will not have a significant economic impact on a substantial number of small entities.                

### Federalism (Executive Order 13132)

Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial direct compliance costs on State and local governments and is not required by statute or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. This rulemaking 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.

### Environmental Impact

                    A Finding of No Significant Impact (FONSI) with respect to the environment was made, at the proposed rule stage of this rulemaking, in accordance with HUD regulations at 24 CFR part 50 that implement section 102(2)(C) of the National Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). The FONSI remains applicable to this final rule and is available through the Federal eRulemaking Portal at                     *http://www.regulations.gov.*                     The FONSI is also available for public inspection during regular business hours in the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street SW, Room 10276, Washington, DC 20410-0500. Due to security measures at the HUD Headquarters building, you must schedule an appointment in advance to review the FONSI by calling the Regulations Division at 202-708-3055 (this is not a toll-free number). HUD welcomes and is prepared to receive calls from individuals who are deaf or hard of hearing, as well as individuals with speech or communication disabilities. To learn more about how to make an accessible telephone call, please visit                     *https://www.fcc.gov/​consumers/​guides/​telecommunications-relay-service-trs.*

### Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) (UMRA) establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and Tribal governments, and on the private sector. This rulemaking does not impose any Federal mandates on any State, local, or Tribal governments, or on the private sector, within the meaning of the UMRA.

      ( print page 100743)    

# List of Subjects in 24 CFR Part 200

      - Administrative practice and procedure
      - Claims
      - Equal employment opportunity
      - Fair housing
      - Housing standards
      - Lead poisoning
      - Loan programs—housing and community development
      - Mortgage insurance
      - Organization and functions (Government agencies)
      - Penalties
      - Reporting and recordkeeping requirements
      - Social security
      - Unemployment compensation
      - Wages

For the reasons stated in the preamble, HUD amends 24 CFR part 200 as follows:

# PART 200—INTRODUCTION TO FHA PROGRAMS

1. The authority citation for part 200 continues to read as follows: 

Authority:12 U.S.C. 1702-1715z-21; 42 U.S.C. 3535(d).

2. In § 200.54: 

a. Amend paragraph (a) by removing the reference to “paragraph (d)” and adding, in its place, a reference to “paragraph (c)”; 

b. Amend paragraph (b) by removing the word “mortgage” and adding, in its place the term, “insured mortgage”; 

c. Redesignate paragraph (c) as paragraph (b)(1); 

d. Amend newly redesignated paragraph (b)(1) by removing the word “mortgage” and adding in its place the term, “insured mortgage” and by adding the word “or” at the end of the paragraph; 

e. Add paragraph (b)(2); and 

f. Redesignate paragraph (d) as paragraph (c). 

The addition reads as follows:

§ 200.54

* * * * *

(b) * * *

(2) If the mortgagor's deposit required by paragraph (a) of this section is not fully disbursed with the initial advance of the insured mortgage proceeds, the mortgagee may disburse up to one (1) percent of the mortgage amount initially endorsed for insurance before requiring that the funds provided by the mortgagor be disbursed in full. The 1 percent of the initially endorsed mortgage amount may be disbursed in full at the time of initial endorsement or may be disbursed in any amount on a monthly basis, whether consecutive or nonconsecutive, until the funds provided by the mortgagor are fully disbursed.

* * * * *

Julia R. Gordon,

Assistant Secretary for Housing—Federal Housing Commissioner.

# Footnotes

1.                             HUD's regulations at 24 CFR 200.54(c) allow an exception to the requirement in 24 CFR 200.54(b) for certain projects involving low-income housing tax credit syndication proceeds, historic tax-credit syndication proceeds, New Markets Tax Credits proceeds, and funds provided by a grant or loan from a Federal, State, or local government.                    
        Back to Citation      

2.                             For additional information about Ginnie Mae and Ginnie Mae's guarantee of MBSs,                         *see*                         Ginnie Mae's About Us web page, available at                         *https://www.ginniemae.gov/​about_​us/​who_​we_​are/​Pages/​funding_​government_​lending.aspx.*
        Back to Citation      

3.                             The Partial Waiver of 24 CFR 200.54(b) was initially granted in July 2021.                         *See*87 FR 14563 (Mar. 15, 2022). The Partial Waiver of 24 CFR 200.54(b) has subsequently been extended and remains in effect until July 4, 2025.                    
        Back to Citation      

4.                             89 FR 63847.                    
        Back to Citation      

[FR Doc. 2024-29390 Filed 12-12-24; 8:45 am]

BILLING CODE 4210-67-P