[Federal Register Volume 87, Number 122 (Monday, June 27, 2022)]
[Rules and Regulations]
[Pages 37990-37998]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-13426]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 880, 881, 883, 884, 886, and 891

[Docket No. FR-5654-F-03]
RIN 2502-AJ22


Streamlining Management and Occupancy Reviews for Section 8 
Housing Assistance Programs

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner.

ACTION: Final rule.

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SUMMARY: This final rule amends existing project-based Section 8 
regulations related to Management and Occupancy Reviews (MORs) for the 
following seven project-based Section 8 programs administered by the 
Office of Multifamily Housing Programs: the Section 8 Housing 
Assistance Payments (HAP) Programs for New Construction, Substantial 
Rehabilitation, State Housing Agencies, New Construction financed under 
Section 515 of the Housing Act of 1949, the Loan Management Set-Aside 
Program, the HAP Program for the Disposition of HUD-Owned Projects, and 
the Section 202/8 Program. Under this final rule, MORs will be 
conducted in accordance with a performance-based schedule published in 
the Federal Register, following a notice and comment period. The first 
such schedule is being published concurrently with this final rule and 
can be found elsewhere in this issue of the Federal Register. HUD is 
making this move to a performance-based MOR schedule to establish a 
risk-based scheduling protocol, reduce the frequency of MORs for 
projects that consistently perform well, and provide consistency across 
programs with respect to MOR frequency. Additionally, HUD is correcting 
a regulatory citation in its regulations concerning the Section 8 
Housing Assistance Program for the Disposition of HUD-Owned Projects.

DATES: The effective date of this final rule is September 26, 2022.

FOR FURTHER INFORMATION CONTACT: Jennifer Lavorel, Director, Program 
Administration Office, Office of Multifamily Asset Management, Office 
of Housing, Department of Housing and Urban Development, 451 7th Street 
SW, Washington, DC 20410-7000; telephone number 202-402-2515 (this is 
not a toll-free number). Hearing- and speech-impaired persons may 
access this number through TTY by calling the Federal Relay Service at 
800-877-8339 (this is a toll-free number).

SUPPLEMENTARY INFORMATION:

I. Background

    On January 14, 2015, HUD published for public comment a proposed 
rule (80 FR 1860) to amend the regulations that govern seven project-
based Section 8 HAP programs administered by the Office of Multifamily 
Housing Programs: the HAP program for New Construction (24 CFR part 
880) and the HAP program for Substantial Rehabilitation (24 CFR part 
881), which provide rental assistance in connection with the 
development of newly constructed or substantially rehabilitated 
privately owned rental housing; the HAP Program for State Housing 
Agencies (24 CFR part 883), which applies to newly constructed or 
substantially rehabilitated housing financed by State agencies; the HAP 
program for New Construction financed under Section 515 of the Housing 
Act of 1949 (24 CFR part 884), which applies to U.S. Department of 
Agriculture rural rental housing projects; the Loan Management Set 
Aside Program (24 CFR part 886, subpart A), which provides rental 
subsidies to HUD-insured or HUD-held multifamily properties 
experiencing immediate or potential financial difficulties; the HAP for 
the Disposition of HUD-Owned Projects (24 CFR part 886, subpart C), 
which provides Section 8 assistance in connection with the sale of HUD-
owned multifamily rental housing projects and the foreclosure of HUD-
held mortgages on rental housing projects; and the Section 202/8 
Program (24 CFR part 891, subpart E), which provides assistance for 
housing projects serving the elderly or households headed by persons 
with disabilities.
    For the above-described programs, contract administrators (CAs) 
conduct Management and Occupancy Reviews (MORs) to assess project 
performance. MORs evaluate management, provide oversight of HUD-
assisted projects, and assure owner compliance with HAP contract 
requirements. Under existing regulations, the frequency of MORs across 
programs is inconsistent. For example, some programs require CAs to 
perform MORs at least annually, while others require an MOR only as 
necessary. The proposed rule sought to provide for consistency across 
programs.
    Existing regulations also fail to take into consideration project 
performance. In fact, many projects assisted under the above-described 
programs consistently receive high MOR scores. For example, in FY 2018, 
90.4 percent of projects received a score of ``Satisfactory,'' ``Above 
Average,'' or ``Superior''; the number of projects receiving such 
scores

[[Page 37991]]

increased to 92.1 percent in FY 2019, 93.1 percent in FY 2020, and 94.1 
percent in FY 2021.
    CAs are required to visit each project as part of the MOR, 
expending staff time and resources to prepare for and conduct each 
review. In order to devote relatively fewer resources to higher-
performing projects, the proposed rule called for the adoption by 
Federal Register Notice, subject to public comment, of an MOR schedule 
that takes project performance into account. The first such 
performance-based MOR proposed schedule \1\ was published concurrently 
with the proposed rule.
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    \1\ ``Section 8 Housing Assistance Programs Proposed Management 
and Occupancy Review Schedule'' (80 FR 1930, Jan. 14, 2015).
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    As proposed, the performance-based MOR schedule also takes HUD's 
risk-rating of each project into account. Under HUD's risk-rating 
system, each project is rated as ``Not Troubled,'' ``Potentially 
Troubled,'' or ``Troubled.'' This risk-rating system is discussed in 
more detail in paragraph III.D, below. The proposed performance-based 
MOR schedule considers both a project's risk-rating and its MOR score 
to establish whether the project's next MOR will be scheduled within 
12, 24, or 36 months of the previous MOR.
    The proposed rule also sought to amend the permitted duration of 
vacancy payments to owners of the above-described projects and of 
projects assisted under the Section 162 Project Assistance Contract 
program. Lastly, the proposed rule included a technical correction to 
Sec.  886.309, replacing a citation to Sec.  886.327 with a citation to 
Sec.  886.328.
    Members of the public interested in more detail about the proposed 
rule or the proposed MOR schedule may refer to the January 14, 2015, 
edition of the Federal Register.

II. This Final Rule

    This final rule follows publication of the January 14, 2015, 
proposed rule as well as the proposed performance-based MOR schedule 
and takes into consideration public comments received on both 
documents. HUD has decided to adopt without substantive change the 
portion of the proposed rule that provides for an MOR schedule to be 
established via Federal Register Notice, subject to public comment. 
Likewise, HUD is adopting without change its proposed methodology for 
MOR scheduling, basing project schedules on both the project's risk 
rating and its MOR score. HUD has adopted the following changes based 
on public comments:
    (1) HUD has decided against proceeding with the proposed changes 
regarding the permitted duration of vacancy payments;
    (2) HUD's proposed rule provided that HUD could inspect a project 
at any time. HUD at the final rule stage requires that an MOR be 
performed within 6 months following a change in ownership or management 
irrespective of a project's performance-based MOR schedule. HUD 
believes adding an inspection at a change in ownership or management is 
appropriate to ensure that the MOR is based on the current management 
at the time;
    (3) HUD is requiring that the CA review all tenant files for each 
sampled file going back to the previous MOR. In other words, if an MOR 
is taking place 36 months from the previous MOR, the CA must assess the 
current year's tenant files and tenant files going back to the previous 
MOR, for each sampled file; and
    (4) HUD is making changes to the final MOR schedule, which is 
published elsewhere in this issue of the Federal Register.
    The effective date of this rule is 90 days after the date of 
publication, which means that CAs will not begin conducting reviews 
pursuant to the performance-based MOR schedule until 90 days from the 
date of publication in the Federal Register.

III. Discussion of Public Comments

    HUD received 23 public comments on the proposed rule and 16 public 
comments on the proposed MOR schedule from management associations, 
public housing authorities, homebuilders' associations, residents of 
public housing, and other interested parties. A number of comments on 
the proposed rule were identical to comments received on the proposed 
performance-based MOR schedule; other comments on the proposed rule 
addressed both documents. HUD is therefore responding to the comments 
received on both documents in this preamble to the final rule.
    In general, many commenters expressed support for both the proposed 
rule and the proposed performance-based MOR schedule. These commenters 
supported basing MOR frequency on project performance, noting the 
associated reduction in burden, improvements in efficiency, and 
targeting of resources. Some commenters expressed opposition to both 
the proposed rule and the proposed performance-based MOR schedule, 
citing concerns about potential decreases in rates of compliance and 
other issues that are discussed in more detail below.

A. Compliance Concerns

    Comment: Reducing the frequency of MORs could affect compliance. 
Commenters stated that a reduction in the frequency of MORs could 
result in increased improper payments. These comments took two general 
views.
    One view focused on the potential for payments where a project had 
fallen out of compliance. For example, commenters wrote that a property 
can deteriorate quickly as a result of on-site staff issues or changes 
in ownership or management, or due to an owner relaxing upkeep and 
housing maintenance standards. One commenter stated that the reduced 
frequency of MORs may ultimately result in additional HUD time and 
resources being expended later to revise the MOR schedule once again to 
reverse the effects of the change to a performance-based MOR schedule.
    Another view focused on the role of the MOR in discovering 
erroneous assistance payments that result from either a tenant, 
property owner, or management agent making an error. One commenter 
stated that errors in day-to-day certifications and recertifications 
have an immediate impact, resulting in the over- or underpayment of 
HAP. With respect to such errors, one commenter stated that, each year, 
new interpretations of the HUD Occupancy Handbook are emphasized, and 
the process of qualifying applicants gets increasingly complicated. The 
commenter stated that, as a result, the MOR becomes a training 
opportunity for staff, who often review requirements with and ask 
questions of CAs. The commenter stated that even the best management 
companies make mistakes and need checks and balances to ensure they are 
on track. Another commenter noted that some owners and management 
agents struggle to understand Enterprise Income Verification (EIV) 
reports or how to reconcile income discrepancies. Another commenter 
stated that annual reviews are much more important with the advent of 
EIV, because many owners and agents do not understand EIV reports or 
how to reconcile income discrepancies and are not therefore properly 
identifying underpayments. Because EIV income discrepancy and error 
information stays in the system for only 1 year after the most recent 
recertification, and because tenants move frequently, it will be 
difficult to catch errors and collect underpaid HAP amounts if the 
property files are being reviewed less frequently than annually.

[[Page 37992]]

Finally, one commenter stated that moving away from annual MORs poses a 
risk to HUD with respect to HUD's goals under the Improper Payments 
Elimination and Recovery Act (IPERA).\2\ Among other things, IPERA 
requires HUD to identify and reduce improper payments.
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    \2\ Public Law 111-204, enacted July 22, 2010.
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    HUD response: HUD believes that the likelihood of payments being 
made to an owner who has failed to maintain their project in a 
satisfactory condition is unlikely to increase as a result of moving to 
a performance-based MOR schedule. Under this new schedule, only 
properties with a satisfactory or higher performance score and a risk 
rating of ``Not Troubled'' will move to a bi- or triennial MOR 
schedule. Nonetheless, this final rule provides HUD with a means of 
increasing the frequency of MORs if merited, after notice and comment. 
In addition, this final rule affirms that, irrespective of a project's 
performance-based MOR schedule, HUD or a CA may inspect a project or 
assess its operations at any time, as merited based on documented 
concerns.
    With respect to the issue of owner or management agent errors 
resulting in over- or underpayment of HAP, HUD does not view the MOR as 
a tool for training owners or their agents on HUD's Occupancy Handbook, 
EIV, or other guidance or systems that owners and their agents must 
understand and employ to administer their projects in compliance with 
HUD requirements. The MOR is a tool employed by HUD to assess 
management performance vis-[agrave]-vis HUD requirements. Owners and 
agents bear the responsibility for administering projects in compliance 
with such requirements and, as such, must assure that staff receive the 
training they need. On the question of system updates of EIV reports, 
HUD Handbook 4350.3 requires both the Income Report (subparagraph 9-
11.B) and the Income Discrepancy Report (subparagraph 9-11.C.3) to be 
maintained in the tenant file. In this final rule, HUD requires that 
the CA review all tenant files for each sampled file going back to the 
previous MOR, relying as needed on reports maintained in tenant files. 
HUD will not be precluded, therefore, from recovering improper payments 
under the performance-based MOR schedule. This requirement addresses 
the comment specific to HUD's goals under IPERA.
    Comment: Reducing MORs could result in the loss of Federal funds. A 
commenter stated that MORs often result in the recovery of assistance 
payments as a result of either the tenant or property owner and 
management agent making an error. Another commenter stated that errors 
in day-to-day certifications and re-certifications have an immediate 
effect, resulting in HAP over- or underpayment. One commenter noted 
that property owners and management agents would lose additional funds, 
because they would err on the side of reducing the overpayment of 
subsidy so as not to outweigh the cost of continued compliance.
    HUD response: HUD believes that the final schedule strikes an 
appropriate cost-benefit balance and that the concerns raised by 
commenters will be resolved once property owners and management agents 
adapt to the new schedule. HUD notes as well that this rule provides 
HUD with the ability to amend the MOR schedule, if needed, via Federal 
Register Notice, following public comment. Having the ability to amend 
the MOR schedule in this way enables HUD to address relatively quickly 
any issues related to the frequency with which MORs are conducted.

B. Scheduling Concerns

    Comment: Adequate staffing, scheduling, and compensation. One 
commenter expressed concerns about the effect of the proposed 
performance-based MOR schedule on the ability of Performance-Based 
Contract Administrators (PBCAs) to assure adequate staffing, as the 
number of MORs scheduled could vary widely from one year to the next. 
The commenter asked whether PBCAs will be compensated for MORs outside 
the scope of the Annual Contributions Contract (ACC) if HUD requires 
additional MORs outside of this schedule.
    HUD response: PBCA staffing is based on schedules adopted by PBCAs, 
as approved by HUD. This final rule has an effective date of September 
26, 2022 in order to provide PBCAs with adequate time to assess all 
Section 8 projects in their portfolios and develop a schedule for the 
completion of MORs consistent with this final rule and the performance-
based MOR schedule. This ``MOR Plan'' will be submitted to HUD for 
review. In evaluating each PBCA's MOR Plan, HUD will consider 
historical data on projects' MOR dates and scores. Among the factors 
HUD will take into consideration is the amount of time since each 
project's previous MOR, recognizing that, due to a lack of funding to 
support MORs on 100 percent of the portfolio annually, MORs since April 
of 2016 have been conducted on only approximately \2/3\ of projects 
annually. PBCAs are aware that HUD may require an MOR sooner than 
reflected in the performance-based MOR schedule if merited based on a 
change in conditions at the project, a congressional inquiry, a report 
from a unit of State or local government, or complaints from project 
residents.

C. Initial and Ongoing Implementation

    Comment: Clarify how HUD will approach the initial implementation 
of the new MOR schedule. One commenter supported the change to a 3-, 2-
, 1-year schedule and suggested that HUD require a baseline inspection 
to establish each project's risk rating. Another commenter recommended 
that upon implementation of the new performance-based schedule, any 
property that has gone 3 or more years without an MOR should receive an 
MOR within the first year, suggesting that a large number of properties 
have not received an MOR in more than 3 years. Another commenter 
recommended that HUD adopt additional parameters, such as requiring a 
review within 12 months for a change of ownership, management agent, or 
on-site personnel. Generally, commenters sought clarification regarding 
how HUD will implement the new MOR schedule.
    HUD response: In implementing the performance-based MOR schedule, 
HUD will establish a time frame for each project's next MOR at the 
first MOR following the effective date of this final rule. Based upon a 
project's MOR score following that first MOR and the project's risk 
rating at the time, HUD will determine the date of each project's next 
MOR according to the performance-based MOR schedule.
    If a project's condition or risk rating worsens following an MOR, 
either HUD or the CA may move up the date of the project's next 
scheduled MOR, irrespective of the performance-based MOR schedule for 
the project. If a project's condition or risk rating improves between 
MORs, the project will remain subject to its schedule as determined 
pursuant to the performance-based MOR schedule. In other words, HUD 
will not entertain requests to reduce the frequency of MORs based upon 
an improvement in a project's condition or risk rating between 
scheduled MORs but instead encourages owners to maintain their projects 
at a level that will merit a decrease in MOR frequency based on the 
project's risk rating and MOR score at the next scheduled MOR.
    HUD agrees with the comment to require an MOR following a change in 
ownership or management and will

[[Page 37993]]

require that an MOR be conducted within 6 months of such a change.

D. HUD's Risk Rating System

    Comment: Clarify the process of determining a project's initial and 
ongoing risk rating. Commenters asked how project owners and property 
managers can ascertain a project's risk rating. A few commenters asked 
what parameters are used in determining risk ratings.
    HUD response: Under HUD's risk-rating system, each project is rated 
as ``Not Troubled,'' ``Potentially Troubled,'' or ``Troubled.'' At a 
high level, HUD's risk-rating system helps HUD to focus resources on 
projects that are most in need of attention. At the individual project 
level, the risk-rating criteria are intended to assist HUD staff in 
assessing the likelihood that a project will decline, considering both 
quantitative and qualitative factors. Individual project risk ratings 
are not made available publicly, as the property rating is part of 
HUD's deliberative process and because a released rating such as 
``Troubled'' or ``Potentially Troubled'' could impair a project's 
ability to obtain the resources needed to improve. HUD will however 
make available to an owner or an authorized agent of the owner an 
individual project's risk rating upon request.
    With respect to the parameters used to determine each project's 
risk rating, HUD considers both quantitative and qualitative measures 
and has adopted some measures unique to insured projects and others 
unique to non-insured projects. As of the effective date of this final 
rule, the following examples of criteria are considered:
    <bullet> For insured projects: the likelihood of a claim within 12 
months or sooner; whether a partial payment of claim or debt 
restructuring is in process; the project's Qualitative Assessment 
Score, which takes into account qualitative factors such as tenant 
complaints and local code violations; the project's vacancy rate, debt 
service coverage ratio, Real Estate Assessment Center (REAC) score; 
whether, for a new construction project, underwriting assumptions have 
been met.
    <bullet> For non-insured projects: whether a HAP termination or 
foreclosure is pending; whether a transfer of budget authority or of 
HAP, debt, and use restrictions is in process; whether a change in 
ownership is required; whether the project has problems that make it 
eligible for a conversion to Housing Choice Voucher assistance that has 
not yet begun; the project's vacancy rate, REAC score; whether the 
project is in compliance with any applicable use agreement.
    Note that the criteria that factor into a project's risk rating and 
the weighting of such criteria are subject to change.
    Comment: Risk-rating changes. A commenter stated that there appear 
to be two items for CAs to monitor to determine the frequency of future 
MORs--risk rating and previous MOR score. The commenter asked if the 
risk rating is based on when the current MOR is complete, and, if not, 
how CAs will be notified of changes to the risk rating between MORs. 
Another commenter asked how the CA will be advised about changes in MOR 
schedules and recommended that HUD implement a standard protocol for 
informing the CA when a property's risk rating changes to ensure that 
the CA adheres to the correct schedule.
    HUD response: As stated previously, at the time an MOR is 
completed, HUD will establish a timeframe for the next MOR based on the 
project's MOR score and its risk rating at that point in time. Changes 
in a project's risk rating will not always trigger a change in a 
project's performance-based MOR schedule. For example, as described 
earlier, HUD will not extend the timeframe between scheduled MORs based 
on improvements in a project's condition or risk rating between MORs. 
On the other hand, HUD or the CA may determine that an MOR is needed 
sooner than scheduled if a project's condition or risk-rating worsens 
(CAs have access to each property's risk-rating through HUD's 
Integrated Real Estate Management System (iREMS)). If HUD determines 
that an MOR is needed sooner than scheduled, HUD will make this known 
to the CA as part of HUD's review of the CA's next successive quarterly 
MOR Plan.
    Comment: Scope and availability of risk classifications. Commenters 
requested how project owners and property managers can ascertain the 
risk classification given to properties. A few commenters asked what 
parameters are used in determining the risk classification. Another 
commenter asked if the risk classification is financially based, and, 
if so, suggested that a property considered ``Troubled'' should be 
reviewed more often than annually regardless of the last MOR rating. 
One commenter suggested that HUD should provide information about how 
input from residents is obtained and used in determining a property's 
risk score. Another commenter suggested that HUD provide additional 
clarification and guidance on assessing overall ratings as it relates 
to risk-based monitoring cycles for MORs. The commenter also asked if 
this schedule would apply to a traditional CA.
    HUD response: HUD's asset risk-rating process uses an objective 
scale that considers financial characteristics (e.g., low debt service 
coverage ratio (DSCR)), recent occurrences (e.g., default, excessive 
vacancies, low Real Estate Assessment Center's (REAC) score), tenant 
input (as assessed during MORs and as provided directly to HUD), and 
pending transactions with HUD (e.g., foreclosure, partial payment of 
claim). The criteria are granular, and there is little room for error/
ambiguity in the ratings. If changes in a property's risk 
classification necessitate an accelerated review, HUD will make this 
known to the CA as part of HUD's review of the CA's next successive 
quarterly MOR Plan.
    The new schedule will apply to all project-based Section 8 
projects, regardless of whether the contract is administered by a PBCA, 
HUD, or a Traditional Contract Administrator.
    Comment: Pools and data. One commenter requested clarification on 
the pool of properties that are included in the percentages that HUD 
has rated ``above average,'' ``superior,'' and ``satisfactory'' 92 
percent of the time. The commenter stated that if the data is coming 
from iREMs, it may reflect only properties that are currently receiving 
MORs, which represent only a portion of the country. One commenter 
stated that the data provided by the MOR Notice was subjective and not 
based on the number and severity of actual findings. Some commenters 
requested a breakdown of MOR ratings for the past 5, 10, and 15 years 
and information about whether the data provided in the MOR Notice is a 
nationally representative sampling of properties, including the size of 
the properties.
    HUD response: The data on percentages was derived from a sample of 
more than 22,000 MORs completed from 2011 through 2013 on all Section 
8-assisted properties; this includes a period of time during which MORs 
were being completed annually. HUD believes that the data is 
sufficiently representative to inform its policy development. A review 
of MORs completed from 2014 through 2015 showed a similar scoring 
distribution as the 2011-2013 sample, though the total number of 
completed reviews was smaller. In each of the years from 2011 through 
2015, a majority of properties (average of 53 percent) has been rated 
``satisfactory,'' with roughly 41 percent receiving an ``above 
average'' or ``superior'' rating, and 6 percent receiving a ``below 
average'' or ``unsatisfactory'' score. More recently,

[[Page 37994]]

for the years 2016 through 2020, 47 percent of properties received a 
``satisfactory'' rating, with 45 percent rated ``above average'' or 
``superior,'' and 8 percent rated ``below average'' or 
``unsatisfactory.''

E. Other Comments

    Comment: Changes to MOR schedule. One commenter recommended that 
properties that are ``Not Troubled'' and have a ``Superior'' score 
should be rewarded with a 48-month time frame before scheduling another 
MOR, which would incentivize owners and agents to achieve a higher 
score. Another commenter suggested that all properties with a rating of 
``Satisfactory'' or below be reviewed every 12 months and those with a 
``Not Troubled'' risk rating and a score of ``Above Average'' or higher 
be reviewed every 24 months. One commenter wrote that a building with a 
``Below Average'' or ``Unsatisfactory'' rating should have an MOR once 
per year and a ``Satisfactory'' or ``Above Average'' or ``Superior'' 
rating should have an MOR once every 2 years. One commenter suggested 
reviewing any property that is considered ``Troubled'' or ``Potentially 
Troubled'' every 12 months regardless of the previous MOR rating and 
stipulating that no property will go longer than 24 months without a 
review. Another commenter recommended that HUD maintain the current MOR 
schedule. One commenter stated that a project with a rating of ``Not 
Troubled'' and an MOR score of ``Satisfactory'' would have little 
incentive to improve if that is all that is needed to receive an MOR 36 
months from the previous MOR.
    HUD response: HUD adopted changes to the proposed schedule based on 
its consideration of these comments. The final schedule is considered 
to present the minimum burden to owners while maintaining adequate 
oversight of management operations and owner compliance. Scheduling 
MORs based on past performance and establishing risk-rating protocols 
constitutes a major step in HUD's efforts to streamline its management 
of assets. HUD believes the final schedule is a good compromise that 
strikes the right balance.
    Comment: Use limited reviews in lieu of fewer reviews. The 
commenter wrote that although some strain is put on HUD and project 
resources in conducting limited reviews, HUD does not explain how a 
``limited review'' puts an undue strain on HUD and project resources to 
justify restructuring the MOR schedule. The commenter suggested that 
HUD should avoid risking the widespread deterioration and decline in 
housing projects due to a lack of adequate oversight, which could also 
ultimately result in the need for increased compensatory resources. The 
commenter requested that HUD provide the reasons behind its assumption 
that a more limited review of housing projects alone would not ease the 
strain on resources while retaining the virtue of regular oversight.
    HUD response: The proposed streamlining of management reviews 
represents HUD's effort to respond to OIG recommendations \3\ and 
criticisms from industry partners. Future research may suggest other 
adjustments to the frequency and scope of reviews, but given the 
consistent ``Above Average,'' ``Superior,'' and ``Satisfactory'' 
ratings for most projects, HUD believes that moving to fewer reviews 
for such projects is justified.
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    \3\ Audit Report 2010-LA-0001: ``HUD's Performance-Based 
Contract Administration Contract Was Not Cost Effective.'' See 
``Conclusion'' on page 19.
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    Comment: Require properties to submit a report to HUD annually that 
assesses the current level of compliance and add incentives for 
compliance. A commenter stated that in conjunction with the new 
performance-based MOR schedule, HUD should require properties to submit 
a report to HUD annually that assesses their current level of 
compliance, which will help HUD reduce costs while allowing HUD to 
focus its staff and resources on areas that require greater attention. 
The commenter explained that the report need not be burdensome to those 
properties that qualify to forgo scheduling an MOR with HUD annually, 
but the report should consist of enough relevant data that HUD can 
determine a property's compliance by means of a quick review. The 
commenter wrote that the report could provide HUD with a consistent 
form of documentation and help to ensure that properties with 
consistently high marks do not lower their standards inadvertently or 
out of convenience or apathy due to the new MOR schedule. The commenter 
submitted that depending on the cost savings HUD realizes, HUD could 
include an incentive process for those properties that remain 
accountable by submitting reports to HUD on an annual basis. The 
commenter suggested that by providing an incentive to properties that 
remain compliant, other properties may actively seek high ratings, 
which will further alleviate costs to HUD and allow even more staff and 
resources to be used in areas that need greater attention.
    HUD response: HUD's view is that an owner would have little 
incentive to report anything other than full compliance when less than 
full compliance would likely induce another review. Thus, HUD believes 
that such certifications would have little if any substantive impact on 
project performance. In contrast, HUD believes that the promise of less 
frequent MORs will incentivize property owners to strive for higher 
performance. HUD and CAs will continue to perform additional MORs when 
warranted.
    Comment: Eliminate redundancies. One commenter recommended that HUD 
eliminate the physical inspection part of the MOR, because REAC 
conducts extensive inspections on a 1- to 3-year schedule. The 
commenter also recommended removing the financial management/
procurement portion of the MOR, since REAC evaluates financial 
statement data. The commenter noted that eliminating redundancies would 
increase efficiency and reduce costs. One commenter stated that MORs 
should focus exclusively on areas that are not covered by other 
reviews--specifically, eliminating excess HUD subsidy payments. The 
commenter believes that the prospect of discovering overpayment of 
subsidy merits a continuation of annual MORs.
    HUD response: Although some elements of the REAC and MOR 
assessments overlap, each serves a distinct and valuable purpose with 
respect to HUD's asset management oversight responsibilities. REAC 
physical inspections provide an objective assessment of a property's 
physical condition and are not meant to consider housekeeping issues 
that may also affect the physical condition of the property. The 
physical assessment component of the MOR supplements the REAC physical 
inspection and provides additional insight into the physical condition 
of the property. The MOR is meant to assess the overall management of 
the property, including management's ability to maintain a property in 
decent, safe, and sanitary condition. The financial management/
procurement elements analyzed in an MOR are supplemental to those 
assessed via an audited financial statement. The MOR provides an 
assessment of the day-to-day financial management of a property, often 
resulting in recommendations for improvements to such things as cash 
controls. In addition, a review performed by HUD staff or the CA, who 
are experienced in multifamily property management, provides a 
necessary perspective that is different from that of a REAC inspector. 
The MOR also evaluates ``rent readiness,'' enabling HUD staff and CAs 
to determine where improvements may be warranted. The MOR results help 
to inform REAC

[[Page 37995]]

inspection scheduling and the determination of whether other financial 
reporting or follow up may be required.
    Comment: Need for staff training. One commenter noted that CAs 
often identify needed improvements to management as part of the MOR. 
The commenter explained that in situations where a new property owner 
or management company has been hired at a project that is in a 3-year 
MOR cycle, training may be needed to assure that the project does not 
deteriorate.
    HUD response: HUD agrees with the commenter and has revised the 
regulation to require an MOR within 6 months of a change in ownership 
or management.
    Comment: Other suggestions. A commenter stated that HUD should 
consider a quantitative and qualitative evaluation of the costs and 
benefits to properties from MORs and how properties' MOR ratings are 
likely to be affected with less-frequent monitoring. The commenter also 
suggested that HUD consider a delay in implementing the performance-
based approach until an evaluation on the outcomes of not performing 
MORs can be conducted. The commenter recommended that HUD consider 
evaluating the impacts based on the portion of the portfolio that is 
currently not being monitored by CAs to validate their assumptions. 
Another commenter suggested using the prevalence of EIV discrepancies, 
voucher programs, and development types (e.g., elderly) when 
determining the frequency of site reviews.
    HUD response: Several alternatives for MOR procedures to reduce the 
burden of annual reviews on satisfactorily operating properties were 
considered. The proposed schedule is considered to present the minimum 
burden to owners, while maintaining adequate oversight of management 
operations and owner compliance. The Department will monitor and 
evaluate the impact of the new performance-based schedule on property 
compliance and revisit the schedule, if needed.

F. Scope

    Comment: Mark-to-Market projects. One commenter questioned whether 
HUD intends to adopt the proposed MOR schedule for projects subject to 
renewal under Mark-to-Market. The commenter suggested that HUD could 
provide a 36-month, 24-month, and 12-month schedule for such projects 
by allowing scaled-back limited reviews between the full MORs for high-
performance properties, which could include analyses of properties' 
financial statements, surplus cash analysis, the risk-rating system, 
and/or other information that HUD collects to ensure regulatory 
compliance. Another commenter requested clarification as to whether the 
MOR schedule would change for restructured Mark-to-Market properties 
under Section 519 of the Multifamily Assisted Housing Reform and 
Affordability Act of 1997 (MAHRA), for which HUD had previously 
provided guidance that MORs would be required annually. The commenter 
also recommended that the inspections for such properties align with 
the new proposed schedule.
    HUD response: Section 519(b)(1) of MAHRA requires CAs to monitor 
the status of projects renewed under Mark-to-Market at least annually. 
Therefore, this schedule would not and could not apply to restructured 
Mark-to-Market properties.
    Comment: Other programs. One commenter requested clarification 
about the applicability of the regulatory changes to other programs, 
noting that the instructions and applicability of form HUD-9834 
indicate that properties other than those with a Section 8 HAP contract 
utilize the form for monitoring and oversight.
    HUD response: The performance-based MOR schedule and the associated 
regulatory changes apply only to projects covered by this Final 
Regulation.

G. Other Suggested Changes and Questions

    Comment: Codify the schedule by regulations. Some commenters 
recommended that HUD should write a permanent schedule in the 
regulations. One commenter recommended that HUD use the physical 
inspection schedule at 24 Code of Federal Regulations (CFR) Sec.  
200.855 and Sec.  200.857 as a model for writing a permanent schedule 
in regulations that permit 3-, 2-, and 1-year reviews.
    HUD response: If HUD determines a change in the schedule is needed, 
a new schedule will be established via Federal Register Notice, 
following a review and comment period. Use of a Federal Register Notice 
to dictate the schedule rather than codifying the schedule in 
regulation provides HUD with greater latitude to modify the schedule 
going forward, if merited.
    Comment: Additional reviews conflict with State and local laws. 
Commenters wrote that providing for HUD to inspect project operation 
and units at any time may conflict with State and local laws, which 
often require notice before entering a resident's unit. The commenters 
suggested that HUD revise the language to clarify that notice is 
required.
    HUD response: HUD Account Executives and CAs are generally familiar 
with local requirements. All independent inspections performed by HUD 
will continue to be in compliance with State and local laws.
    Comment: Other applications. One commenter recommended that HUD 
consider similar reduction principles when developing the next 
iteration of the Public Housing Assessment System and the Section 8 
Management Assessment Program.
    HUD response: While HUD appreciates this comment, this 
recommendation is outside the scope of this rulemaking as the Public 
Housing Assessment System and the Section 8 Management Assessment 
Program fall under the purview of the Assistant Secretary for Public 
and Indian Housing.
    Comment: The Notice fails to provide adequate notice for certain 
persons to comment on the proposed Paperwork Reduction Act (PRA) 
changes. One commenter asked how HUD will ensure that the solicitation 
of comments, as required under the PRA in accordance with 5 CFR 1320.8, 
is adequately provided to certain persons, especially those who are 
elderly or lack computers.
    HUD response: The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 
3501-3520) and regulations at 5 CFR 1320 require that agencies publish 
requests for comments on paperwork in the Federal Register, which HUD 
has done for HUD's form HUD-9834, ``Management Review for Multifamily 
Housing Projects.'' HUD will also ensure updates are processed in 
accordance with applicable notice and comment procedures set forth by 
the PRA. As for the ``certain persons, including those who are elderly 
or lack computers,'' referenced by the commenter, HUD notes that public 
libraries provide access to computers.

IV. Findings and Certifications

Regulatory Review--Executive Orders 12866, 13563, and 13771

    Under Executive Order 12866 (Regulatory Planning and Review), a 
determination must be made whether a regulatory action is significant 
and, therefore, subject to review by the Office of Management and 
Budget (OMB) in accordance with the requirements of the order. This 
rule was determined to be a non-significant regulatory action under 
section 3(f) of Executive Order 12866.
    Executive Order 13563 (Improving Regulation and Regulatory Review) 
directs executive agencies to analyze

[[Page 37996]]

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 
also 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. This rule is 
part of HUD's retrospective review carried out under Executive Order 
13563.

Need for Regulatory Action

    Executive Order 12866 emphasizes that ``Federal agencies should 
promulgate only such regulations as are required by law, are necessary 
to interpret the law or are made necessary by compelling public need, 
such as material failures of private markets to protect or improve the 
health and safety of the public, the environment, or the well-being of 
the American people.'' Because the schedule for MORs was established by 
regulation, HUD must use rulemaking to reduce the burden of annual 
MORs. Moreover, HUD has determined that the current MOR schedule places 
a strain on HUD resources and on projects that consistently receive 
high marks on their MORs. This fact, and the costs placed on projects 
to prepare for an MOR and that result from the interruption in normal 
operations caused by an MOR, makes reducing this burden an important 
topic for rulemaking. As a result, consistent with Executive Order 
13563, this rulemaking is intended to modify, streamline, or repeal 
burdensome regulations.

Discussion of Costs and Benefits

    This final rule will provide consistency across the project-based 
Section 8 programs administered by the Office of Multifamily Housing 
Programs for the scheduling of MORs and allow HUD to issue the schedule 
by publishing it in the Federal Register, subject to public comment. 
The purpose of an MOR is to verify property compliance with the terms 
of the HAP contract. The MOR process is a lengthy and resource-heavy 
process, involving the inspection of residents' units; a review of 
owner compliance with civil rights regulations; a review of complaints 
from residents, congressional inquiries, and media reports; and a 
review of any contractual violations and imposed sanctions. Because 
many of the properties that receive assistance under a Section 8 HAP 
contract have consistently received high marks on their MORs, reducing 
the frequency of MORs will result in fewer interruptions in project 
operations. HUD also concludes that deficiencies discovered as part of 
the MOR of a property that receives a high mark are typically less than 
the costs to the project of preparing for and participating in the MOR.

Information Collection Requirements

    The information collection requirements for this rule have been 
approved by the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB 
control numbers 2502-0178. In accordance with the Paperwork Reduction 
Act, an agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information, unless the collection 
displays a currently valid OMB control number. The overall burden of 
this collection will be reduced, however, by reducing the frequency of 
MORs for properties that perform well.

Environmental Impact

    A Finding of No Significant Impact (FONSI) with respect to the 
environment was made as part of the proposed rule in accordance with 
HUD regulations at 24 CFR part 50, which implement section 102(2)(C) of 
the National Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). 
The FONSI remains applicable to this final rule and is available for 
inspection on Regulations.gov.

Unfunded Mandates Reform Act

    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 rule does not impose a 
Federal mandate on any State, local, or tribal government, or on the 
private sector, within the meaning of UMRA.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (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. It is HUD's position 
that the burden reduction measures provided by this rule would not have 
a significant economic impact (beneficial or adverse) on a substantial 
number of small entities.
    As noted earlier in this preamble, this rule is one of the 
regulatory actions being undertaken as part of HUD's Retrospective 
Review Plan, established in accordance with Executive Order 13563. The 
primary focus of this rule is to reduce burden across all project 
owners regardless of size. The focus of MORs is on ensuring that the 
units that HUD subsidizes are decent, safe, and sanitary and are made 
available to eligible tenants in a nondiscriminatory manner. These are 
not requirements that HUD can alter on the basis that a project owner 
is a small entity. However, as noted above, this rule reduces burden 
for all project owners, large or small, that manage their properties 
well in accordance with HUD regulations and score well under the MOR 
rating system.

Executive Order 13132, Federalism

    Executive Order 13132 (``Federalism'') prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
(1) imposes substantial direct compliance costs on State and local 
governments and is not required by statute, or (2) preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive Order. This final rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on State and local governments nor preempt State law 
within the meaning of the Executive Order.

Catalog of Federal Domestic Assistance.

    The Catalog of Federal Domestic Assistance number applicable to the 
programs that would be affected by this rule is 14.195.

List of Subjects

24 CFR Part 880

    Annual contributions contract, Audit, Construction, Contract 
administration, Financing, Grant programs--housing and community 
development, Housing assistance, Housing assistance payments contract, 
Management, New construction, Owner, Public housing agency, Property 
standards, Rent subsidies, Reporting and recordkeeping requirements, 
Section 8, Tenants, Units.

24 CFR Part 881

    Annual contributions contract, audit, contract administration, 
conversion, housing assistance, Grant programs--housing and community 
development, housing assistance payments contract, inspections, low-
income family, owner, public housing agency, Rent subsidies, Reporting 
and recordkeeping

[[Page 37997]]

requirements, Section 8, Substantial rehabilitation, Tenants, Units.

24 CFR Part 883

    Annual contributions contract, Audit, Contract administration, 
Housing finance agencies, Grant programs--housing and community 
development, Housing assistance, Housing assistance payments contract, 
Low-income family, Owner, Rent subsidies, Reporting and recordkeeping 
requirements, Section 8, Substantial rehabilitation, State agencies, 
Tenants, Units.

24 CFR Part 884

    Annual contributions contract, Audit, Contract administration, 
Conversion, Grant programs--housing and community development, Housing 
assistance, Housing assistance payments contract, Income limit, 
Inspections, Low-income family, Maintenance, New construction, Owner, 
Public housing agency, Rent subsidies, Reporting and recordkeeping 
requirements, Rural areas, Rural housing, Section 8, Security deposits, 
Tenants, Units, Utility deposits.

24 CFR Part 886

    Audit, Contract administration, Grant programs--housing and 
community development, Housing assistance, Housing assistance payments 
contract, Income, Inspection, Lead poisoning, Maintenance, Marketing, 
Mortgages, Owner, Rehabilitation, Rent subsidies, Reporting and 
recordkeeping requirements, Section 8, Security deposits, Special 
allocations, Tenants, Units, Utility deposits.

24 CFR Part 891

    Aged, Grant programs--housing and community development, Capital 
advances, Individuals with disabilities, Loan programs--housing and 
community development, Project rental assistance, Rent subsidies, 
Reporting and recordkeeping requirements, Section 8, Supportive housing 
for persons with disabilities, Supportive services, Tenants, Units.

    Accordingly, for the reasons described in the preamble, HUD amends 
24 CFR part 880, 881, 883, 884, 886, and 891 as follows:

PART 880--SECTION 8 HOUSING ASSISTANCE PAYMENTS PROGRAM FOR NEW 
CONSTRUCTION

0
1. The authority citation for 24 CFR part 880 continues to read as 
follows:

    Authority:  42 U.S.C. 1437a, 1437c, 1437f, 3535(d), 12701, and 
13611-13619.

0
2. Revise Sec.  880.612 to read as follows:


Sec.  880.612   Management and occupancy reviews.

    (a) The contract administrator will conduct management and 
occupancy reviews to determine whether the owner is in compliance with 
the Contract. Such reviews will be conducted in accordance with a 
schedule set out by the Secretary and published in the Federal 
Register, following notice and the opportunity to comment. Where a 
change in ownership or management occurs, a management and occupancy 
review must be conducted within six months following the change in 
ownership or management.
    (b) HUD or the Contract Administrator may inspect project 
operations and units at any time.
    (c) Equal Opportunity reviews may be conducted by HUD at any time.

PART 884--SECTION 8 HOUSING ASSISTANCE PAYMENTS PROGRAM, NEW 
CONSTRUCTION SET-ASIDE FOR SECTION 515 RURAL RENTAL HOUSING 
PROJECTS

0
3. The authority citation for 24 CFR part 884 continues to read as 
follows:

    Authority:  42 U.S.C. 1437a, 1437c, 1437f, 3535(d), and 13611-
13619.

0
4. Revise Sec.  884.224 to read as follows:


Sec.  884.224   Management and occupancy reviews.

    (a) The contract administrator will conduct management and 
occupancy reviews to determine whether the owner is in compliance with 
the Contract. Such reviews will be conducted in accordance with a 
schedule set out by the Secretary and published in the Federal 
Register, following notice and the opportunity to comment. Where a 
change in ownership or management occurs, a management and occupancy 
review must be conducted within six months.
    (b) HUD or the Contract Administrator may inspect project 
operations and units at any time.
    (c) Equal Opportunity reviews may be conducted by HUD at any time.

PART 886--SECTION 8 HOUSING ASSISTANCE PAYMENTS PROGRAM--SPECIAL 
ALLOCATIONS

0
5. The authority citation for 24 CFR part 886 continues to read as 
follows:

    Authority:  42 U.S.C. 1437a, 1437c, 1437f, 3535(d), and 13611-
13619.

0
6. Revise Sec.  886.130 to read as follows:


Sec.  886.130   Management and occupancy reviews.

    (a) The contract administrator will conduct management and 
occupancy reviews to determine whether the owner is in compliance with 
the Contract. Such reviews will be conducted in accordance with a 
schedule set out by the Secretary and published in the Federal 
Register, following notice and the opportunity to comment. Where a 
change in ownership or management occurs, a management and occupancy 
review must be conducted within six months.
    (b) HUD or the Contract Administrator may inspect project 
operations and units at any time.
    (c) Equal Opportunity reviews may be conducted by HUD at any time.


Sec.  886.309   [Amended]

0
7. In Sec.  886.309, in paragraph (e), remove ``Sec.  886.327'' and add 
in its place ``Sec.  886.328''.

0
8. Revise Sec.  886.335 to read as follows:


Sec.  886.335   Management and occupancy reviews.

    (a) The contract administrator will conduct management and 
occupancy reviews to determine whether the owner is in compliance with 
the Contract. Such reviews will be conducted in accordance with a 
schedule set out by the Secretary and published in the Federal 
Register, following notice and the opportunity to comment. Where a 
change in ownership or management occurs, a management and occupancy 
review must be conducted within six months.
    (b) HUD or the Contract Administrator may inspect project 
operations and units at any time.
    (c) Equal Opportunity reviews may be conducted by HUD at any time.

PART 891--SUPPORTIVE HOUSING FOR THE ELDERLY AND PERSONS WITH 
DISABILITIES

0
9. The authority citation for 24 CFR part 891 continues to read as 
follows:

    Authority:  12 U.S.C. 1701q; 42 U.S.C. 1437f, 3535(d), and 8013.

0
10. Add Sec.  891.582 to read as follows:


Sec.  891.582   Management and occupancy reviews.

    (a) The contract administrator will conduct management and 
occupancy reviews to determine whether the owner is in compliance with 
the HAP Contract. Such reviews will be conducted in accordance with a 
schedule set out by the Secretary and published in the Federal 
Register, following notice and the opportunity to comment. Where a 
change in ownership or management occurs, a management and occupancy 
review must be conducted within six months.

[[Page 37998]]

    (b) HUD or the Contract Administrator may inspect project 
operations and units at any time.
    (c) Equal Opportunity reviews may be conducted by HUD at any time.

Julia R. Gordon,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 2022-13426 Filed 6-24-22; 8:45 am]
BILLING CODE 4210-67-P