Proposed Rule

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TABLE 1—INITIAL INSPECTION THRESHOLDS—Continued

Appendix number of RR ASB No. RB.211–72–AG244, revision 4, that
identifies affected LP compressor blades by S/N

Initial inspection threshold

3F ...................................................................................................................
3G ..................................................................................................................
3H ..................................................................................................................
3I ....................................................................................................................
3J ...................................................................................................................
3K ..................................................................................................................
3L ...................................................................................................................

(2) Thereafter, perform repetitive UIs of the
affected LP compressor blades within every
100 flight cycles.
(3) Use paragraph 3.A.(2) of
Accomplishment Instructions of RR ASB No.
RB.211–72–AG244, Revision 4, dated
December 22, 2011, and paragraphs 1.
through 3.B. of Appendix 1 of that ASB, or
paragraphs 3.B.(1) through 3.B.(3) of
Accomplishment Instructions of RR ASB No.
RB.211–72–AG244, Revision 4, dated
December 22, 2011, and paragraphs 1.
through 3.C. of Appendix 2 of that ASB, to
perform the UIs.
(4) Do not return to service any engine with
blades that failed the inspection required by
this AD.
(5) For blades that are removed from the
engine and pass inspection, re-apply dry film
lubricant before re-installing the blades.
(6) After the effective date of this AD, do
not install any affected LP compressor blade
that has reached the initial inspection
threshold in Table 1, unless it has passed the
initial and repetitive UIs required by this AD.
(f) Credit for Actions Accomplished in
Accordance With Previous Service
Information
You may take credit for the initial
inspection that is required by paragraph
(e)(1) of this AD if you performed the initial
inspection before the effective date of this AD
using RR ASB No. RB.211–72–AG244, dated
August 7, 2009; ASB No. RB.211–72–AG244,
Revision 1, dated January 26, 2010; ASB No.
RB.211–72–AG244, Revision 2, dated August
18, 2011; or ASB No. RB.211–72–AG244,
Revision 3, dated December 13, 2011.

wreier-aviles on DSK7SPTVN1PROD with PROPOSALS

(g) Alternative Methods of Compliance
The Manager, Engine Certification Office,
FAA, may approve AMOCs for this AD. Use
the procedures found in 14 CFR 39.19 to
make your request.
(h) Related Information
(1) For more information about this AD,
contact Alan Strom, Aerospace Engineer,
Engine Certification Office, FAA, Engine &
Propeller Directorate, 12 New England
Executive Park, Burlington, MA 01803;
phone: 781–238–7143; fax: 781–238–7199;
email: [email protected].
(2) Refer to European Aviation Safety
Agency AD 2012–0025, dated February 8,
2012, for related information.
(3) For service information identified in
this AD, contact Rolls-Royce plc, Corporate
Communications, P.O. Box 31, Derby,
England, DE248BJ, telephone: 011–44–1332–
242424; fax: 011–44–1332–245418, or email:

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Within
Within
Within
Within
Within
Within
Within

46 months after the effective date of this AD.
58 months after the effective date of this AD.
70 months after the effective date of this AD.
82 months after the effective date of this AD.
94 months after the effective date of this AD.
106 months after the effective date of this AD.
118 months after the effective date of this AD.

http://www.rolls-royce.com/contact/
civil_team.jsp. You may review copies of the
referenced service information at the FAA,
Engine & Propeller Directorate, 12 New
England Executive Park, Burlington, MA. For
information on the availability of this
material at the FAA, call 781–238–7125.
Issued in Burlington, Massachusetts, on
April 27, 2012.
Colleen M. D’Alessandro,
Assistant Manager, Engine & Propeller
Directorate, Aircraft Certification Service.
[FR Doc. 2012–10693 Filed 5–2–12; 8:45 am]
BILLING CODE 4910–13–P

DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
24 CFR Parts 5, 200, 207, and 232
[Docket No. FR–5465 P–01]
RIN–2502–AJ05

Federal Housing Administration (FHA):
Section 232 Healthcare Facility
Insurance Program-Strengthening
Accountability and Regulatory
Revisions Update
Office of the Assistant
Secretary for Housing—Federal Housing
Commissioner, HUD.
ACTION: Proposed rule.
AGENCY:

In 2010 through 2011, HUD
commenced and completed the process
of revising regulations applicable to,
and closing documents used in, FHA
insurance of multifamily rental projects,
to reflect current policy and practices in
the multifamily mortgage market. The
multifamily rental project regulations
and closing documents had not been
updated in more than 20 years. Through
this proposed rule, HUD commences a
similar process for its regulations
governing insurance of healthcare
facilities under section 232 of the
National Housing Act, and the closing
documents used in such transactions.
HUD’s Section 232 program insures
mortgage loans to facilitate the
construction, substantial rehabilitation,
purchase, and refinancing of nursing
homes, intermediate care facilities,

SUMMARY:

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board and care homes, and assistedliving facilities. This rule proposes
amendments to update HUD’s Section
232 regulations, to reflect current policy
and practices, and to improve
accountability and strengthen risk
management.
DATES:

Comment Due Date: July 2, 2012.

Interested persons are
invited to submit comments regarding
this proposed rule to the Regulations
Division, Office of General Counsel,
Department of Housing and Urban
Development, 451 7th Street SW., Room
10276, Washington, DC 20410–0500.
Communications must refer to the above
docket number and title. There are two
methods for submitting public
comments. All submissions must refer
to the above docket number and title.
1. Submission of Comments by Mail.
Comments may be submitted by mail to
the Regulations Division, Office of
General Counsel, Department of
Housing and Urban Development, 451
7th Street SW., Room 10276,
Washington, DC 20410–0500.
2. Electronic Submission of
Comments. Interested persons may
submit comments electronically through
the Federal eRulemaking Portal at
www.regulations.gov. HUD strongly
encourages commenters to submit
comments electronically. Electronic
submission of comments allows the
commenter maximum time to prepare
and submit a comment, ensures timely
receipt by HUD, and enables HUD to
make them immediately available to the
public. Comments submitted
electronically through the
www.regulations.gov Web site can be
viewed by other commenters and
interested members of the public.
Commenters should follow the
instructions provided on that site to
submit comments electronically.

ADDRESSES:

Note: To receive consideration as public
comments, comments must be submitted
through one of the two methods specified
above. Again, all submissions must refer to
the docket number and title of the rule. No
Facsimile Comments. Facsimile (FAX)
comments are not acceptable.

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Federal Register / Vol. 77, No. 86 / Thursday, May 3, 2012 / Proposed Rules
Public Inspection of Public
Comments. All properly submitted
comments and communications
submitted to HUD will be available for
public inspection and copying between
8 a.m. and 5 p.m. weekdays at the above
address. Due to security measures at the
HUD Headquarters building, an advance
appointment to review the public
comments must be scheduled by calling
the Regulations Division at (202) 708–
3055 (this is not a toll-free number).
Individuals with speech or hearing
impairments may access this number
via TTY by calling the Federal Relay
Service at 1–800–877–8339. Copies of
all comments submitted are available for
inspection and downloading at
www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:

Michael B. Vaughn, Director, Office of
Residential Care Facilities, Office of
Healthcare Programs, Office of Housing,
Department of Housing and Urban
Development, 451 7th Street SW., Room
6264, Washington, DC 20410–8000;
telephone number 202–708–0599 (this
is not a toll-free number). Persons with
hearing or speech impairments may
access this number through TTY by
calling the toll-free Federal Relay
Service at 1–800–877–8339.
SUPPLEMENTARY INFORMATION:

wreier-aviles on DSK7SPTVN1PROD with PROPOSALS

I. Background
The American population is
undergoing a significant demographic
change as an increasing portion is age
65 or older or approaching 65.1 As
several governmental and private
organizations have reported, the
growing number of older adults is
placing increased demands on the
public health system and on medical
and social services.2 These demands
include greater need for nursing homes,
long-term care facilities, and assisted
living arrangements. Further, although
options for long-term care and assisted
living have expanded, nursing homes
will likely retain a major role in caring
for the most severely impaired and
vulnerable populations.3 Moreover,
nursing homes are increasingly offering
medical services similar to those offered
in hospitals after surgery, illness, or
other sudden medical problems. In
those situations, older adults in
particular need a higher level of care
1 See http://www.aoa.gov/aoaroot/
aging_statistics/index.aspx.
2 See http://www.cdc.gov/mmwr/preview/
mmwrhtml/mm5206a2.htm.
3 Bercovitz, Anita, Decker, Frederic H., Jones,
Adrienne, Remsburg, Robin, End of Life Care in
Nursing Homes: 2004 National Nursing Home
Survey, National Health Statistics Reports, No. 9,
October 8, 2008, pages 1 and 2.

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because hospital stays are shorter than
previously.4
The Section 232 Program
Section 232 of the National Housing
Act (12 U.S.C. 1715w) (Section 232)
authorizes FHA to insure mortgages
made by private lenders to finance the
development of nursing homes,
intermediate care facilities, board and
care homes, and assisted living facilities
(collectively, residential healthcare
facilities). The Section 232 program
allows for long-term, fixed-rate
financing for new and rehabilitated
properties for up to 40 years. Existing
properties without rehabilitation can be
financed with or without Ginnie Mae 5
Mortgage Backed Securities for up to 35
years.
Eligible borrowers under the Section
232 program include investors, builders,
developers, public entities (nursing
homes), and private nonprofit
corporations and associations. For
nursing homes only, applicants may be
public agencies that are licensed or
regulated by a state to care for
convalescents and people who need
nursing or intermediate care. The
documents executed at loan closing
provide that the borrower entity may
not engage in any other business or
activity.
Facilities covered by an FHA-insured
mortgage under the Section 232 program
must accommodate 20 or more residents
who require skilled nursing care and
related medical services, or those who,
while not in need of nursing home care,
are in need of minimum but continuous
care provided by licensed or trained
personnel. Assisted living facilities,
nursing homes, intermediate care
facilities, and board and care homes
may be combined in the same facility
covered by an insured mortgage or may
be in separate facilities. Insured
mortgages may include the cost of major
movable equipment, daycare facilities,
and the installation of fire safety
equipment. Assisted living facilities,
nursing homes, intermediate care
homes, and board and care homes must
be licensed or regulated by the
appropriate state agency, municipality,
or other political subdivision where the
facility is located.
The maximum amount of the loan for
new construction and substantial
rehabilitation is equal to 90 percent (95
percent for nonprofit organization
sponsors) of the estimated value of
physical improvements and major
4 See http://www.healthinaging.org/
agingintheknow/chapters_print_ch_trial.asp?ch=15.
5 Ginnie Mae is a registered service mark of the
Government National Mortgage Association; See
http://www.ginniemae.gov/.

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26219

movable equipment. For existing
projects, the maximum is 85 percent (90
percent for nonprofit organization
sponsors) of the estimated value of the
physical improvements and major
movable equipment.
As the need for residential care
facilities has expanded, requests to FHA
to make mortgage insurance available
for such facilities has also expanded. As
with any program expansion, FHA seeks
to ensure that program requirements
currently in place are sufficient to meet
increased demand, and prevent
mortgage defaults that not only impose
a risk to the FHA insurance fund but
also jeopardize residents of Section 232
facilities.
The Need for Regulatory Update
HUD’s regulations governing the
Section 232 program are codified in 24
CFR part 232. These regulations were
promulgated in 1971, with some
revisions made in the 1970s and the
1980s. Two regulatory updates were
issued in the 1990s. On November 29,
1994, HUD issued a final rule that
amended the Section 232 regulations to
implement statutory authority to insure
assisted living facilities for the care of
frail elderly persons, as authorized by
section 511 of the Housing and
Community Development Act of 1992
(Pub. L. 102–550, approved October 28,
1992). (See 59 FR 61228.) On April 1,
1996, HUD issued a final rule to comply
with the then-Administration’s
regulatory review initiative to
streamline regulations, including by
removing obsolete ones. (See 63 FR
14396.) The preamble to that final rule
stated that the only changes being made
to the Section 232 regulations were to
remove the regulatory provisions
concerning lender eligibility and to
provide a cross-reference to 24 CFR part
200, subpart A, which addressed the
general eligibility requirements to be
approved as an FHA-approved lender.
(See 63 FR 14397.) The 1996 rule was
the last time that HUD amended the
Section 232 regulations. Given the far
greater demand today for nursing
homes, and long-term care and assisted
living facilities, and the changes, over
the years, in how these facilities offer
services to an aging population, as
discussed above, HUD’s Section 232
regulations need to be revised and
updated.
In the 1970s, regulations governing
FHA-insured transactions were
generally structured so that details
pertaining to the duties and obligations
of parties involved in the transaction
were primarily addressed in contractual
documents, and that has been the case
as well for the Section 232 regulations.

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This approach has offered FHA and the
parties to a transaction the necessary
flexibility to adjust requirements as may
be appropriate given the specifics of a
given transaction, and HUD believes
they should be retained for certain
transaction aspects. After 16 years,
however, certain policy and practices
have developed that are not unique to
certain parties and transactions and
should be reflected in regulation. For
example, since the operating revenues
of the healthcare facility determine the
financial health of the project and the
FHA insurance fund, it has become
clear that oversight by FHA of such
revenues is vital.
II. This Proposed Rule
Through this rule, and similar to
HUD’s recent update of multifamily
rental project regulations and closing
documents, HUD proposes to update its
Section 232 regulations and related
closing documents. Notice of the
publication of the documents is
provided separately in the Federal
Register through Notice FR–5623–N–01,
Federal Housing Administration (FHA)
Healthcare Facility Documents:
Proposed Revisions and Updates and
Notice of Information Collection.
Through this proposed rule, HUD
updates terminology and makes
amendments to reflect current policy
and practices. The specific amendments
proposed to update HUD’s Section 232
regulations by this rule follow. The
update includes amendments to 24 CFR
parts 5, 200, 207, and 232 dealing with,
respectively, Uniform Reporting
Standards, Real Estate Assessment
Center (REAC) inspections, Multifamily
Mortgage Insurance contract
requirements, and strengthening of the
eligibility and oversight provisions of
the healthcare programs. As the most
significant proposals are in 24 CFR part
232, these are addressed first in this part
of the preamble.

wreier-aviles on DSK7SPTVN1PROD with PROPOSALS

A. Mortgage Insurance for Nursing
Homes, Intermediate Care Facilities,
Board and Care Homes, and Assisted
Living Facilities (Part 232)
Nomenclature Change
In its review of the regulations in 24
CFR part 232, HUD noted that the
regulations use both the term
‘‘borrower’’ and ‘‘mortgagor.’’ These
terms have the same meaning, and to
avoid any misunderstanding that they
have different meanings, this proposed
rule would substitute the term
‘‘borrower’’ for ‘‘mortgagor’’ throughout
the part 232 regulations. Closing
documents for the Section 232 program
may sometimes refer to the borrower as

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the ‘‘mortgagor,’’ ‘‘lessor,’’ and/or the
‘‘owner.’’
Eligibility Requirements (Subpart A)
Subpart A of the part 232 regulations,
entitled ‘‘Eligibility Requirements,’’
would be revised as follows:
The rule would revise eligibility
requirements under § 232.1 to establish
an exception from the multifamily
program requirements for eligible
borrowers. Eligible borrowers for
multifamily projects are addressed in 24
CFR 200.5.
A new § 232.3 is added to part 232 to
provide an appropriate definition of an
eligible borrower for healthcare
facilities. In a Section 232 transaction,
HUD maintains a relationship with the
borrower, and the borrower assumes a
responsibility to ensure the appropriate
maintenance and use of project assets.
Given the importance of this
relationship, the proposed rule would
include a new definition of eligible
borrower in § 232.3. This revised
definition would conform to current
legal changes in the forms of
commercial property ownership. HUD
notes that the single asset entity form of
ownership has become the standard
form of ownership for commercial real
estate transactions. The revised
definition, therefore, provides that the
borrower shall be a single asset
borrower entity acceptable to the
Federal Housing Commissioner
(Commissioner) and shall possess the
power necessary and incidental to
operating the project. The regulation
provides that the Commissioner may
approve an exception to this single asset
requirement in limited circumstances
based upon such criteria as may be
specified by the Commissioner.
The rule would redesignate existing
eligibility requirements presently
contained in current § 232.3. That
section presently establishes the
standards for healthcare facility
bathroom and resident ratios and access.
Moving this section to § 232.7 would
merely restructure the sequence of the
eligibility requirements in the
regulations.
The rule would add a new § 232.9 to
define mortgaged property. Mortgaged
property would be defined to include all
of the borrower’s interest in any
property, real, personal, or mixed,
covered by the mortgage or mortgages
securing the note endorsed for
insurance or held by the Secretary. This
definition is consistent with the
definition of mortgaged property
currently in the Security Agreement,
used in Section 232 transactions, and as
used in the revised Borrower’s Security
Instrument.

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The rule would add § 232.11 to
require borrowers to establish at final
closing and maintain throughout the
term of the mortgage loan a long-term
debt service reserve account. Given the
complexities of, and volatility of both
funding for and market demand for
residential care facilities, such reserve
account is important for improved risk
management. The reserve account may
be financed from mortgage proceeds,
provided that the loan remains within
the loan to value ratio. (See § 232.903,
discussed below.) The amount required
to be initially placed in the borrower’s
long-term debt service reserve account,
and the minimum long-term balance to
be maintained in that account, will be
determined during underwriting and
separately identified in the firm
commitment. Although HUD may,
under certain circumstances, permit the
balance to fall below the required
minimum long-term balance, the owner
may not take any distribution except
when both the long-term debt service
reserve account is funded at the
minimal long-term level and such
distribution is otherwise permissible.
The proposed establishment of the longterm debt service reserve account is in
conjunction with the proposals
governing the use and distribution of
project funds, which is discussed below.
This long-term reserve account would
be required for new loans and
refinancings.
Contract Rights and Obligations
(Subpart B)
Subpart B of the part 232 regulations
addresses contract rights and obligations
to which all section 232 transactions are
subject unless otherwise specified in
another regulatory section in part 232.
Section 232.251, entitled ‘‘CrossReference,’’ would be retitled ‘‘Other
Applicable Regulations’’ and would
continue to include the regulations
cross-referenced in existing § 232.251,
but also clarify the applicability of the
new provisions included in subpart B.
The rule would add a new § 232.254
to provide that borrowers may, to the
extent allowed in their transactional
loan documents and applicable law,
make and take distributions of
mortgaged property. Although
previously the borrower could take
distributions only annually (or, in
limited circumstances, semi-annually),
the proposed rule would allow
borrowers to take distributions more
frequently, provided that, upon making
a calculation of borrower surplus cash,
no less frequently than semi-annually,
they can demonstrate positive surplus
cash in their semi-annual financial
reports or repay any distributions made

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during the fiscal period to the extent
that they are not in a positive surplus
cash position at the end of the fiscal
period in which distributions are made.
HUD has included language in the
proposed regulation to clarify that it
does not intend to override existing
transactional agreements.
The proposed rule provides that upon
each calculation of borrower surplus
cash, the borrower must demonstrate
positive surplus cash, or, to the extent
that surplus cash is negative, the
borrower must repay any distributions
taken during such calculation period
within 30 days or within such shorter
period as may be required by HUD. The
borrower shall be deemed to have taken
distributions to the extent that surplus
cash is negative unless, in conjunction
with the calculation of surplus cash, the
borrower provides to HUD
documentation evidencing, to HUD’s
reasonable satisfaction, a lesser amount
of total distributions.
New § 232.254 would also include a
definition of borrower surplus cash,
which would be defined in the
Borrower Regulatory Agreement.
The rule would add a new § 232.256
to require that a borrower may not lease
any portion of the project, or enter into
any agreement with an operator without
HUD’s prior written consent.
The rule would revise the
introductory paragraph of § 232.903,
relating to the § 232/223(f) program, by
amending the maximum mortgage
amounts to provide that the new debt
service reserve account may be
considered part of the cost of financing.
No such amendment is necessary for
any § 232 programs other than § 232/
223(f), since, for other programs,
funding of the debt service reserve is an
eligible cost that may be funded from
mortgage proceeds to the extent that the
insured loan remains below the
maximum loan to value ratio.
Eligible Operators and Facilities and
Restrictions on Fund Distributions (New
Subpart F)
This proposed rule would add to part
232 a new subpart F entitled, ‘‘Eligible
Operators and Facilities and
Restrictions on Fund Distributions.’’ As
noted earlier in this preamble, operators
carry out significant day-to-day duties
in the administration of healthcare
facilities. HUD finds that this important
role needs to be explicitly addressed in
regulation, by providing for the requisite
accountability by such entities. The
proposed new provisions recognize that
a borrower may share its responsibility
over the project with another entity.
However, the fact that a borrower
chooses to contract with a separate

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entity to operate the project does not
relieve the borrower of its obligation to
safeguard and ensure the proper use of
all project assets, or of its obligation to
ensure that acts of the operator do not
cause the borrower to be in
noncompliance with the borrower’s own
obligations. Instead, these new
provisions are directed to ensuring that
an operator, which may be an entity
separate from the borrower, is also
required to safeguard and ensure the
proper use of all project assets.
New § 232.1001 would advise that the
scope of this new subpart is to establish
the requirements applicable to the
operator of a residential care facility
under the Section 232 regulations.
New § 232.1003 would define several
key terms used in a Section 232
transaction. Section 232.1003 would
define ‘‘project,’’ ‘‘identity of interest
projects,’’ ‘‘management agent,’’
‘‘operator,’’ and ‘‘owner operator’’.
New § 232.1005 would address
commingling of funds and direct that an
operator must not, without HUD’s prior
approval, allow funds attributable to an
FHA-insured or HUD-held healthcare
facility to be commingled with funds
attributable to another healthcare
facility or business.
New § 232.1007 would provide that
payments from operating funds for
goods and services must be reasonable
and not exceed amounts normally paid
for such goods or services in the
geographic area where the services are
rendered or the goods are furnished,
unless otherwise approved by HUD.
New § 232.1009 provides that no
principal of the borrower entity may
receive a salary or any payment of funds
derived from operation of the project,
other than from permissible
distributions, without HUD’s prior
approval.
Violations of these requirements on
the use of project assets and income
would be subject to double damages, in
addition to HUD’s other remedies,
pursuant to statutory amendments,
described hereinafter, enacted in 2004.
Section 421 of the Housing and
Community Development Act of 1987
(12 U.S.C. 1715z–4a), entitled ‘‘Double
damages remedy for unauthorized use of
multifamily housing project assets and
income,’’ was amended by section 220
of Title II of Division I of the
Consolidated Appropriations Act, 2005
(Public Law 108–447, 118 Stat. 2809,
approved December 8, 2004), to
expressly provide that a violation by
‘‘any person’’ of a regulatory agreement
that applies to ‘‘a nursing home,
intermediate care facility, board and
care home, assisted living facility, or
hospital whose mortgage is or, at the

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26221

time of the violations, was insured or
held by the Secretary under title II of the
National Housing Act’’ is subject to the
double damages provisions of 12 U.S.C.
1715z–4a (See 118 Stat. 3320, and 12
U.S.C. 1715z–4a(a)(1)(A).) Section 220
further amended section 421 to include
as ‘‘any person’’ subject to double
damages ‘‘any nursing home lessee or
operator’’ and to permit an action for
double damages ‘‘to recover any assets
or income used by a person in violation
of * * * any applicable regulation.’’
(See 12 U.S.C. 1715z–4a(a)(2)(D) and 12
U.S.C. 1715z–4a(a)(1)(D).) Any assets or
income used in violation of these
regulatory requirements would be
subject to double damages under section
421, as well as to all other remedies
available to HUD, in the same way that
use of assets or income in violation of
a regulatory agreement is subject to such
double damages and other remedies.
New § 232.1011 would address
financial statements, which are also
discussed in the proposed amendment
to 24 CFR 5.801 below. This new
section provides that, within 90 days
following the end of each fiscal year, the
owner must provide HUD with audited
financial statements. These audited
financial statements must be prepared
and certified in accordance with the
requirements of 24 CFR 5.801 and
200.36. The operator must provide HUD
with complete quarterly and year-todate financial reports based on an
examination of the books and records of
the operator’s operations with respect to
the healthcare facility.
New § 232.1013 would address leases
and would provide that, except as
provided in residential agreements in
the normal course of business, an
operator may not lease or sublease any
portion of the project without HUD’s
prior written approval.
New § 232.1015 would address the
role of management agents in a Section
232 project and would provide that an
operator may, with the prior written
approval of HUD, execute a
management agent agreement setting
forth the duties and procedures for
managing matters related to the project.
However, both the management agent
and the management agent agreement
must be acceptable to HUD and
approved in writing by HUD. New
§ 232.1015 also provides that an
operator may not enter into any
agreement that provides for a
management agent to have rights to or
claims on funds owed to the operator.
New § 232.1015 would also address
fees paid by an operator or borrower to
a management agent. This section
provides that management agent
agreements and the fees set forth therein

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must be approved by HUD, and that the
fee may not be renegotiated without
HUD’s approval once the management
agent agreement has been executed.
New § 232.1015 also provides that HUD
may approve an identity-of-interest
management agent to be a management
agent only if amounts paid to the
identity-of-interest agent for goods and
services provided to the healthcare
facility are not in excess of amounts that
would be charged by an independent
agent and only if all goods and services
benefit the project.
New § 232.1017 would address
treatment of project revenue. New
§ 232.1017(a) directs that an operator
must deposit in a separate segregated
account in the project’s name all
revenue the operator receives operating
the healthcare facility, and that the
account must be with a financial
institution whose deposits are insured
by an agency of the Federal
Government, provided that, in order to
minimize risk to the insurance fund,
where balances are likely to exceed
federal limits on insurance of such
deposits, funds must be in depository
institutions acceptable to Ginnie Mae.
New § 232.1017(b) provides that
operators, whether owner-operators or
non-owner operators, must ensure that
the healthcare facility maintain positive
working capital at all times. If a
quarterly financial statement
demonstrates negative working capital,
the operator must cure such violation or
HUD may declare a default of the
operator’s regulatory agreement and
pursue remedies.
New § 232.1019 reflects recognition of
the highly regulated environment in
which many Section 232 projects
operate, and would require operators,
unless HUD determines otherwise, to
promptly notify the owner, mortgagee,
and HUD of certain matters placing the
facility’s viable operation, and thus the
mortgage security, at substantial risk.
These matters include violations of
permits and approvals, imposition of
civil money penalties, or governmental
investigations or inquiries involving
fraud. HUD has determined that, given
the responsibilities of servicing lenders
with respect to risk mitigation of their
residential care facility portfolio, it is
appropriate that the lenders are timely
provided with the same financial,
census, and performance data (of the
owner entity, as well as operator entity)
that HUD is requiring borrowers and
operators to routinely provide to HUD.
Accordingly, this regulatory section
provides that, concurrently with
submitting to HUD financial data and
census and performance data, the

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borrower and operator also provide this
data to the servicing lender.
In addition to the amendments made
to the Section 232 regulations, HUD
makes the following conforming
amendments to 24 CFR parts 5, 200, and
207.
B. Uniform Financial Reporting
Standards (24 CFR Part 5; § 5.801)
This proposed rule would amend the
reporting requirements of 24 CFR 5.801
to include operators of projects with
mortgages insured or held by HUD
under the Section 232 program as
entities that must submit financial
reports. Borrowers are currently subject
to this regulatory reporting requirement.
HUD has determined that the audited
financial statements of a borrower/
owner are not sufficient to assess the
financial status of a Section 232 project,
because the viability of the project is
heavily dependent on the operator’s
financial performance. HUD must also
receive and review the financial
statements of the operator, as may be
applicable, for an accurate assessment of
the project’s financial status.
This proposed rule would, therefore,
require owners to submit audited
financial statements on an annual basis
and would require operators to submit
financial statements quarterly, covering
separately the most recent quarter and
the fiscal year to date. Quarterly and
year-to-date financial statements are
appropriate for operators for a number
of reasons. First, they provide much
more timely notice of operator financial
weaknesses and trends than annual
statements would provide. The
timeliness is further enhanced in that
the operator statements may be
operator-certified rather than audited,
allowing the operator to provide them
much more promptly at the end of a
reporting period. With respect to the
skilled nursing facilities (of which a
large portion of HUD’s residential care
facility portfolio is comprised), much of
the information is also furnished in
Medicare and Medicaid Cost Reports to
fulfill other government obligations and
serve as a basis for reimbursement, a
practice that provides an additional
check on accuracy.
This proposed rule also amends the
reporting requirements with respect to
facilities insured under Section 232, by
specifying that the financial statements
being submitted to HUD must be
concurrently submitted to the servicing
lender. Given the servicing lenders’
responsibilities with respect to risk
mitigation of their residential care
facility portfolio, and given the
difficulty that some lenders have in
obtaining financial data related to the

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facility, it is appropriate that the lenders
be timely provided the same financial
data (of the owner entity, as well as the
operator entity) that HUD is requiring
borrowers and operators to routinely
provide to HUD. Both owner and
operator financial reporting
requirements would apply beginning
with the year in which the final rule
following this proposed rule becomes
effective.
C. Introduction to FHA Programs:
Physical Condition of Multifamily
Properties (Part 200, Subpart P)
Section 200.855(c) of HUD’s
regulations (24 CFR 200.855(c)), which
addresses timing of inspections, would
narrow and streamline the scope of
Section 232 facilities that are routinely
inspected by the Real Estate Assessment
Center (REAC). In particular, facilities
such as assisted living facilities and
board and care facilities would be
subject to routine REAC inspections
unless the state or local government had
a reliable and adequate inspection
system in place. The remainder of the
Section 232 properties, and properties
that are routinely surveyed pursuant to
regulations of the Centers for Medicare
and Medicaid Services, would be
inspected only when and if HUD
determined, on a case-by-case basis and
on the basis of information received,
that inspection of such facility is needed
to assure protection of residents or the
adequate preservation of the project.
This amendment would help assure that
facilities surveyed frequently by state
regulatory agencies, for physical
condition matters related to resident
care and safety, are not subject to
duplicative inspections. HUD- and
FHA-approved mortgagees now have
ready electronic access to the results of
state agency inspections conducted
pursuant to requirements of the Centers
for Medicare and Medicaid Services.
D. Multifamily Housing Mortgage
Insurance (Part 207)
Contract Rights and Obligations
(Subpart B)
Subpart B of the part 232 regulations
addresses contract rights and obligations
and the rights and duties of the
mortgagee under the contract of
insurance.
HUD is taking this opportunity to
make changes to HUD’s regulations in
this subpart affecting the Section 232
programs. These proposed changes alter
several of the amendments to the
multifamily regulations adopted last
spring. (See 76 FR 24363 May 11, 2011,
HUD Multifamily Rental Projects:
Regulatory Revisions.)

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Section 207.255, ‘‘Defaults for
purposes of insurance claim,’’ includes
language defining the date of defaults.
This proposed rule revises
§ 207.255(a)(4) by clarifying the dates on
which certain monetary and other
defaults occur.
This proposed rule modifies
§ 207.258, ‘‘Insurance claim
requirements,’’ by deleting in paragraph
(a)(2) a parenthetical expression.
This proposed rule also modifies
§ 207.258(b)(1)(i) by clarifying the time
period within which a mortgagee may
elect to assign a mortgage to the
Commissioner.
E. Costs and Benefits of Proposed
Revisions to the Section 232 Program
Regulations
As discussed in this preamble, this
proposed rule updates HUD’s Section
232 program regulations similar to the
2011 updates that were made to HUD’s
multifamily rental project regulations
and accompanying closing documents.
The revisions proposed by this rule
update the Section 232 regulations to
reflect existing practices in financing
and refinancing healthcare facilities,
and to decrease risk to the program due
to outdated regulations and the need for
greater accountability by healthcare
facility operators. Key changes
highlighted in the preamble include
requiring borrowers to establish a long
term debt-service reserve account,
requiring operators to submit quarterly
and year-to-date self-certified financial
reports, and reducing duplicative
physical inspections.
The valued benefits from fewer
physical inspections, and the costs from
increased financial reporting and the
opportunity cost of the debt service
reserve fund, each total less than $1
million. Unvalued benefits include
uninterrupted services of healthcare
facilities, which otherwise would close
due to foreclosure. Transfers from
avoided claim payments total $13
million. The total costs, benefits, and
transfers of this rule will not in any year
exceed the $100 million threshold set by
Executive Order 12866 (Regulatory
Planning and Review). Therefore, the
rule is not economically significant.
The risk mitigation requirements
proposed by this rule are necessary due
to the combination of two particular
risks facing healthcare facilities. First,
similar to multifamily residential
properties, the owner usually relies on
a separate entity to operate the facility.
The performance of the operator is
crucial to the mortgagor’s ability to
repay the mortgage. Since the operator
may not be known to FHA at the time
of underwriting, or may change during

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the term of the mortgage, the risk of
operator deficiency is difficult to assess.
Second, unlike residential or other
commercial properties, the value of a
poorly maintained and operated facility
can decrease dramatically because the
building was designed specifically for
healthcare use and may not retain the
mortgaged value at resale due to a lack
of alternative uses. Thus, FHA may face
more uncertainty when selling
foreclosed healthcare properties than
foreclosed residential properties. This
rule therefore proposes requirements
intended to identify operator
deficiencies earlier and ensure that
funds are available if financial problems
arise.
The rule also proposes to require the
borrower to establish a long-term debt
service reserve fund. Although FHA
currently requires owners of new
construction projects to maintain a
reserve fund until sustainable
occupancy is reached, usually one to
two years, this new requirement would
require a reserve fund to be maintained
throughout the life of the mortgage and
used in case of operator deficiency. Of
the 30 insurance claims from 2009 to
mid-2011, operator deficiencies played
a role in the property’s performance
demise in 23. Further, these claims were
distributed widely over age of loan, not
simply in the first few years, indicating
the need for a reserve fund over the life
of the mortgage. The maintenance of a
reserve is to decrease the number of
nonperforming mortgages by providing
additional time to resolve operator
deficiencies.
Based on FHA’s experience, a reserve
fund can be an important source for
debt service payments during a period
of instability. Thus, the reserve can
delay the point at which a lender finds
it necessary to file a claim, providing
extra time for the parties to restructure
and stabilize a project and avoid a claim
to HUD. FHA has accepted claims
where borrowers were pursuing
workouts, but stability could not be
achieved prior to the lenders’ expenses
becoming too burdensome to sustain.
The extra time afforded by a debt
service reserve makes avoiding a claim
more likely under such scenarios. In its
analysis of 2009, 2010, and early 2011
claims, HUD found that 5 out of 30
projects brought to claim may have
benefited from the additional time
provided by a debt service reserve.
Finally, as an additional offset for
borrowers to the added requirement of
debt service reserve, the rule also
provides greater flexibility to borrowers
in the making of distributions and use
of surplus cash. Assuming that, as a
result of the rule, 2 fewer claims were

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26223

paid annually, FHA would save $13
million per year, if projected based on
the average unpaid balance (UPB) of
assigned Section 232 mortgages from
2009–2011, which was $6.5 million. In
the absence of these claim payments,
FHA could pass these savings on to its
mortgagors and thus such savings are
best viewed as a transfer between
borrowers.
The amount of funds required to be
initially placed in the debt service
reserve fund, and the minimum longterm balance, will be determined during
underwriting. FHA estimates that on
average, a borrower’s monthly debt
service will increase by approximately
1.5 percent. Based on an expected
average of $3.4 billion annually in the
value of new mortgage endorsements,
borrowers would be required, in
aggregate, to place and maintain $51
million in the fund. The cost to
borrowers is the lower return from
restricting this amount to the reserve
fund compared to other investment
options. This opportunity cost of
holding these funds in a reserve account
is, therefore, calculated as the difference
between the average market rate of
return and the risk-free interest rate. The
average market rate is represented by
the real annualized return of the S&P
500 between 1990 and 2011, which
equals 5.37 percent. The risk-free
interest rate is the average 10-year
Treasury rate between 1990 and 2011,
which equals 2.6 percent. The
opportunity cost of holding the
estimated funds in a reserve fund totals
$141,270.
This rule also requires operators to
submit annual and year-to-date financial
reports. Currently, the borrower, but not
the operator, is required to provide
audited financial statements. Although
submission of the operator’s financial
reports is a new requirement, the
expense of such reports is mitigated by
allowing the operator to submit selfcertified, rather than audited statements.
Moreover, the required operator
financial information is data that
operators need to maintain in the
normal course of business in order to
monitor and manage their own
operations effectively. FHA estimates
this will require approximately 10,000
employee hours annually to prepare and
submit these reports (2,500 respondents,
4 reports per year and 1 hour to generate
each report). The median wage of the
employees who prepare these reports is
approximately $75 per hour. Thus, the
total cost of complying with this
requirement would be $750,000.
Finally, this rule exempts facilities
from FHA physical inspection
requirements if they are inspected by

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state or local agencies in order to
eliminate duplicative inspections. FHA
estimates that, as a result,
approximately 1,391 inspections would
be avoided per year. The estimated cost
per inspection totals $475, which would
mean a total annual inspection savings
of $660,725.
In addition to the valued benefits, this
rule also provides benefits that are less
easily quantified. As explained above,
HUD expects the reserve fund and
financial reporting requirements to

decrease the number of claims paid.
While some troubled facilities may be
stabilized and continue operating, at
this stage of delinquency, they are often
forced to close. Thus, there is a
disruption of healthcare services to the
community and costs to moving
residents from one facility to another. In
smaller communities, there are fewer
alternatives for facility residents, and
the benefits of avoiding foreclosure are
greater as residents may be without
needed services for a long period. In

larger cities, existing facilities may be
able to absorb the additional demand
fairly quickly. In both of these cases,
however, residents bear costs associated
with transferring between facilities.
Although the avoided loss or
interruption of services is difficult to
quantify and varies by city, the avoided
loss or interruption of services is an
important benefit that this rule is trying
to achieve.

SUMMARY OF VALUED ANNUAL BENEFITS, COSTS, AND TRANSFERS

Debt Service Reserve Fund ........................................................................................................
Financial Reporting ......................................................................................................................
Physical Inspections.

Benefits

Costs

Transfers

$660,725
........................

$141,270
750,000

$13,000,000
........................

660,725

891,270

13,000,000

Total ......................................................................................................................................

III. Findings and Certifications

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Executive Order 13563, Regulatory
Review
The President’s Executive Order (EO)
13563, entitled ‘‘Improving Regulation
and Regulatory Review,’’ was signed by
the President on January 18, 2011, and
published on January 21, 2011, at 76 FR
3821. This EO requires 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.’’ Section 4 of the EO, entitled
‘‘Flexible Approaches,’’ provides, in
relevant part, that where relevant,
feasible, and consistent with regulatory
objectives, and to the extent permitted
by law, each agency shall identify and
consider regulatory approaches that
reduce burdens and maintain flexibility
and freedom of choice for the public. As
discussed earlier in this preamble, the
Section 232 regulations have not been
updated since 1996. HUD submits that
the changes proposed by this rule to the
Section 232 regulations are consistent
with the EO’s directions. As the
preceding section discussed, the
changes proposed by this rule will
modernize the Section 232 program,
reduce burden by eliminating
duplicative physical inspections,
providing flexibility to borrowers in the
making of distributions and use of
surplus cash, and increasing
accountability to strengthen the
program, thereby helping it ensure that
it remains viable for the financing of
healthcare facilities.

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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.
This rule is directed to creating
transparency in HUD’s Section 232
program by, codifying existing and
longstanding provisions imposed on a
Section 232 borrower, and strengthening
this program through stronger risk
management practices, such as making
operators more accountable for their
role in administering Section 232
healthcare facilities. As noted under the
discussion of EO 13563, this rule
proposes amendments that will enhance
HUD’s oversight ability, while
minimizing the burdens on private
actors, to the benefit of participants and
facility clients. Additionally, by
clarifying and codifying existing
requirements, the rule makes it easier
for borrowers and operators to comply
with their legal obligations. Through
this rule, the viability of the Section 232
program and HUD’s enforcement
authority are increased, and waste,
fraud, and abuse are reduced.
Approximately 3,343 of the
anticipated annual participants in the
Section 232 program are small entities,
including approximately 2,500 entities
involved in nursing homes, 725 entities
involved in assisted living facilities, and
70 other entities. (The total figure
exceeds the number of facilities
involved, because a single transaction
many involve distinct legal entities

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serving as the operator and owner.) The
changes required by this rule do not
impose significant economic impacts on
these small entities or otherwise
adversely disproportionately burden
such small entities. The reporting
requirements of this rule have been
tailored to complement normal business
accounting practices. Accordingly, the
undersigned certifies that this rule will
not have a significant economic impact
on a substantial number of small
entities.
Notwithstanding HUD’s
determination that this rule will not
have a significant effect on a substantial
number of small entities, HUD
specifically invites comments regarding
any less burdensome alternatives to this
rule that will meet HUD’s objectives as
described in this preamble.
Environmental Impact
A Finding of No Significant Impact
with respect to the environment has
been made, 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)). That
finding is available for public inspection
between the hours of 8 a.m. and 5 p.m.
weekdays in the Regulations Division,
Office of General Counsel, Department
of Housing and Urban Development,
451 Seventh Street SW., Room 10276,
Washington, DC 20410–0500. Due to
security measures at the HUD
Headquarters building, please schedule
an appointment to review the finding by
calling the Regulations Division at 202–
402–3055 (this is not a toll-free
number). Individuals with speech or
hearing impairments may access this

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number via TTY by calling the Federal
Relay Service at 800–877–8339.
Executive Order 13132, Federalism
Executive Order 13132 (entitled
‘‘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 rule will not have
federalism implications and would not
impose substantial direct compliance

costs on state and local governments or
preempt state law within the meaning of
the Executive Order.

Information Collection Requirements
The information collection
requirements contained in this proposed
rule have been submitted to the Office
of Management and Budget (OMB)
under the Paperwork Reduction Act of
1995 (44 U.S.C. 3501–3520). 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 burden of the information
collections in this proposed rule is
estimated as follows:

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

REPORTING AND RECORDKEEPING BURDEN
Number of
respondents

Section reference

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24
24
24
24
24
24
24
24
24
24

CFR
CFR
CFR
CFR
CFR
CFR
CFR
CFR
CFR
CFR

Number of
responses
per
respondent

Estimated average time for
requirement
(in hours)

Estimated annual burden
(in hours)

5.801(c)(4) Financial information .......................................................
232.11 HUD written approval .............................................................
232.1005 HUD written approval .........................................................
232.1007 HUD approval ....................................................................
232.1009 HUD written approval .........................................................
232.1011 Financial statement ............................................................
232.1013 Specifications for lease agreement, HUD written approval
232.1015 HUD written approval .........................................................
232.1017 HUD written approval .........................................................
232.1019 HUD written approval .........................................................

2,500
100
25
25
50
2,500
25
25
25
1,750

4
1
1
1
1
1
1
1
1
2

1
1
1
1
1
60
1
1
1
.50

10,000
100
25
25
50
150,000
25
25
25
1,750

Totals ........................................................................................................

7,025

14

68.5

162,025

In accordance with 5 CFR
1320.8(d)(1), HUD is soliciting
comments from members of the public
and affected agency concerning this
collection of information to:
(1) Evaluate whether the proposed
collection of information is necessary
for the proper performance of the
functions of HUD, including whether
the information will have practical
utility;
(2) Evaluate the accuracy of HUD’s
estimate of the burden of the proposed
collection of information;
(3) Enhance the quality, utility, and
clarity of the information to be
collected; and
(4) Minimize the burden of the
collection of information on those who
are to respond, including through the
use of appropriate automated collection
techniques or other forms of information
technology; e.g., permitting electronic
submission of responses.
Interested persons are invited to
submit comments regarding the
information collection requirements in
this rule. Comments must refer to the
proposal by name and docket number
(FR–5465–P–01) and must be sent to:

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HUD Desk Officer, Office of
Management and Budget, New
Executive Office Building, Washington,
DC 20503. Fax number: 202–395–6947.
and
Reports Liaison Officer, Office of
Housing, Department of Housing and
Urban Development, 451 Seventh Street
SW., Room 9116, Washington, DC
20410–8000.
Interested persons may submit
comments regarding the information
collection requirements electronically
through the Federal eRulemaking Portal
at http://www.regulations.gov. HUD
strongly encourages commenters to
submit comments electronically.
Electronic submission of comments
allows the commenter maximum time to
prepare and submit a comment, ensures
timely receipt by HUD, and enables
HUD to make them immediately
available to the public. Comments
submitted electronically through the
http://www.regulations.gov Web site can
be viewed by other commenters and
interested members of the public.
Commenters should follow the
instructions provided on that site to
submit comments electronically.

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List of Subjects
24 CFR Part 5
Administrative practice and
procedure, Aged, Claims, Grant
programs—housing and community
development, Individuals with
disabilities, Intergovernmental relations,
Loan programs—housing and
community development, Low and
moderate income housing, Mortgage
insurance, Penalties, Pets, Public
housing, Rent subsidies, Reporting and
recordkeeping requirements, Social
Security, Unemployment compensation,
Wages.
24 CFR Part 200
Administrative practice and
procedure, Claims, Equal employment
opportunity, Fair housing, Home
improvement, Housing standards, Lead
poisoning, Loan programs—housing and
community development, Mortgage
insurance, Organization and functions
(Government agencies), Penalties,
Reporting and recordkeeping.
24 CFR Part 207
Mortgage insurance—Nursing homes,
Intermediate care facilities, Board and

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care homes, and Assisted living
facilities.
24 CFR Part 232
Fire prevention, Health facilities,
Loan programs—health, Loan
programs—housing and community
development, Mortgage insurance,
Nursing homes, Reporting and
recordkeeping requirements.
Accordingly, parts 5, 200, 207, and
232 of title 24 of the Code of Federal
Regulations are proposed to be 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. 1437a, 1437c, 1437d,
1437f, 1437n, 3535(d), and Sec. 327, Pub. L.
109–115, 119 Stat. 2936.

2. Amend § 5.801 to:
a. Add paragraph (a)(6),
b. Revise the first sentence of the
introductory text of paragraph (b),
c. Add paragraph (b)(4),
d. Revise the heading of paragraph (c),
e. Add paragraph (c)(4), and
f. Add paragraph (d)(4) to read as
follows:

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§ 5.801 Uniform financial reporting
standards.

(a) * * *
(6) Operators of projects with
mortgages insured or held by HUD
under section 232 of the Act (Mortgage
Insurance for Nursing Homes,
Intermediate Care Facilities, Board and
Care Homes).
(b) Entities (or individuals) to which
this subpart is applicable must provide
to HUD such financial information as
required by HUD. Such information
must be provided on an annual basis,
except as required more frequently
under paragraph (c)(4) of this section.
* * *
*
*
*
*
*
(4) With respect to financial reports
relating to properties insured under
Section 232 of the Act, concurrently
with submitting the information to
HUD, this information must also be
submitted to the mortgagee in a format
and manner prescribed by the Secretary.
(c) Filing of financial reports. * * *
* * *
(4) For entities listed in paragraph
(a)(6) of this section, the financial
information to be submitted to HUD in
accordance with paragraph (b) of this
section must be submitted to HUD on a
quarterly and fiscal-year-to-date basis,
within 30 days of the end of each
quarterly reporting period. The financial
statements submitted pursuant to

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paragraph (a)(6) of this section may, at
the operator’s option, be operatorcertified rather than audited, provided,
however, that if the operator is also the
borrower, then that entity’s obligation to
submit an annual audited financial
statement within 90 days of its fiscal
year end (in addition to its obligation as
an operator to submit financial
information on a quarterly and year-todate basis) remains and is not obviated.
Additionally, if HUD has reason to
believe that a particular operator’s
operator-certified statements may be
unreliable or are presented in a manner
that is inconsistent with Generally
Accepted Accounting Principles, HUD
may, on a case-by-case basis, require
audited financial statements from the
operator. Additionally, with respect to
facilities with FHA-insured or HUDheld Section 232 mortgages, HUD may
request more frequent financial
statements from the borrower, as
specified under (a)(4)(x), and/or the
operator on a case-by-case basis when
the circumstances warrant. Nothing in
the regulations in this section limits
HUD’s ability to obtain further or more
frequent information when appropriate
pursuant to the applicable regulatory
agreement.
(d) * * *
(4) Entities described in paragraph
(a)(6) of this section must comply with
the requirements of this section with
respect to fiscal years ending [a date of
one year after the effective date of the
final rule to be inserted at the final rule
stage] and later.
*
*
*
*
*
PART 200—INTRODUCTION TO FHA
PROGRAMS
3. The authority citation for part 200
continues to read as follows:
Authority: 12 U.S.C. 1702–1715–z–21; 42
U.S.C. 3535(d).

4. In 200.855, add a new paragraph
(c)(5) to read as follows:
§ 200.855 Physical condition standards
and physical inspection requirements.

*

*
*
*
*
(c) * * *
(5)(i) For Assisted Living Facilities
and Board and Care Facilities, the initial
inspection required under this subpart
will be conducted within the same time
restrictions set forth in paragraph
200.855(c)(4) immediately above, and
any further inspections will be
conducted at a frequency determined
consistent with § 200.857, and
(ii) For any other Section 232
facilities, the inspection will be
conducted only when and if HUD
determines, on the basis of information

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received, such as through a complaint,
site inspection, or referral by a state
agency, on a case-by-case basis, that
inspection of a particular facility is
needed to assure protection of the
residents or the adequate preservation of
the project.
PART 207—MULTIFAMILY HOUSING
MORTGAGE INSURANCE
5. The authority citation for part 207
continues to read as follows:
Authority: 12 U.S.C. 1701z–11(e), 1713,
and 1715b; 42 U.S.C. 3535(d).

6. In § 207.255(a)(4) introductory text,
remove the reference to ‘‘paragraph (b)’’
and add in its place a reference to
‘‘paragraph (a)’’.
7. In § 207.258 revise paragraphs (a)(2)
introductory text and (b)(1)(i) to read as
follows:
§ 207.258

Insurance claim requirements.

(a) * * *
(2) For mortgages funded with the
proceeds of state or local bonds, GNMA
mortgage-backed securities,
participation certificates, or other bond
obligations specified by the
Commissioner (such as an agreement
under which the insured mortgagee has
obtained the mortgage funds from thirdparty investors and has agreed in
writing to repay such investors at a
stated interest rate and in accordance
with a fixed repayment schedule), any
of which contains a lock-out or
prepayment premium, the mortgagee
must, in the event of a default during
the term of the prepayment lock-out or
prepayment premium:
*
*
*
*
*
(b) * * *
(1) * * *
(i) If the mortgagee elects to assign the
mortgage to the Commissioner, the
mortgagee shall, at any time within 30
days after the date HUD acknowledges
the notice of election, file its application
for insurance benefits and assign to the
Commissioner, in such manner as the
Commissioner may require, any
applicable credit instrument and the
realty and chattel security instruments.
*
*
*
*
*
PART 232—MORTGAGE INSURANCE
FOR NURSING HOMES,
INTERMEDIATE CARE FACILITIES,
BOARD AND CARE HOMES, AND
ASSISTED LIVING FACILITIES
8. The authority citation for 24 CFR
part 232 continues to read as follows:
Authority: 12 U.S.C. 1715b, 1715w; 42
U.S.C. 3535(d).

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Federal Register / Vol. 77, No. 86 / Thursday, May 3, 2012 / Proposed Rules
9. Throughout part 232, the word
‘‘mortgagor’’ is revised to read
‘‘borrower’’ wherever it appears.
10. Revise § 232.1 to read as follows:
§ 232.1

Eligibility requirements.

All of the requirements, except
§ 200.5, set forth in 24 CFR part 200
subpart A, apply to project mortgages
insured under Section 232 of the
National Housing Act (12 U.S.C.
1715w), as amended.
11. Redesignate § 232.3 as § 232.7 and
add a new § 232.3 to read as follows:
§ 232.3

Eligible borrower.

For mortgages originated after [a date
of one year after the effective date of the
final rule to be inserted at the final rule
stage], the borrower shall be a single
asset entity acceptable to the
Commissioner, as limited by the
applicable section of the Act, and shall
possess the powers necessary and
incidental to operating the project,
except that the Commissioner may
approve a non-single asset borrower
entity under such circumstances, terms,
and conditions determined and
specified as acceptable to the
Commissioner.
12. Add new §§ 232.9 and 232.11 to
read as follows:
§ 232.9

Mortgaged property.

Mortgaged property includes all of
Borrower’s interests in property, real,
personal, or mixed, covered by the
mortgage or mortgages securing the note
endorsed for insurance or held by the
Secretary, as further defined in the
mortgage documents.

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§ 232.11 Establishment and maintenance
of long-term debt service reserve account.

To be eligible for insurance under this
part, and except with respect to
Supplemental Loans to Finance
Purchase and Installation of Fire Safety
Equipment (subpart C of this part), the
borrower must establish at final closing
and maintain throughout the term of the
mortgage a long-term debt service
reserve account. This long-term debt
service reserve account may be financed
as part of the initial mortgage amount,
provided that the maximum mortgage
amount as otherwise calculated is not
thereby exceeded. The amount required
to be initially placed in the long-term
debt service reserve account and the
minimum long-term balance to be
maintained in that account will be
determined during underwriting and
separately identified in the firm
commitment. Although HUD may, when
appropriate to avert a mortgage
insurance claim, permit the balance to
fall below the required minimum longterm balance, the borrower may not take

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any distribution of mortgaged property
except when both the long-term debt
service reserve account is funded at the
minimal long-term level and such
distribution is otherwise permissible.
Subpart B—Contract Rights and
Obligations
13. Revise § 232.251 to read as
follows:
§ 232.251

Other applicable regulations.

(a) Cross-reference. (1) All of the
provisions, except § 207.258b, of 24 CFR
part 207, subpart B, relating to
mortgages insured under section 207 of
the National Housing Act, apply to
mortgages insured under section 232 of
the Act.
(2) For the purposes of this subpart,
all references in 24 CFR part 207 to
section 207 of the Act shall be construed
to refer to section 232 of the Act.
(3) Unless otherwise specified in this
part, the regulations in this subpart B
apply to all mortgages insured under
section 232 of the Act.
(b) [Reserved]
14. Add new §§ 232.254 and 232.256,
to read as follows:
§ 232.254 Withdrawal of project funds,
including for repayments of advances from
the borrower, operator, or management
agent.

(a) General. Borrower may make and
take distributions of mortgaged
property, as set forth in the mortgage
loan transactional documents, to the
extent and as permitted by the law of
the applicable jurisdiction, provided
that, upon each calculation of borrower
surplus cash, which calculation shall be
made no less frequently than semiannually, borrower must demonstrate
positive surplus cash, or to the extent
surplus cash is negative, repay any
distributions taken during such
calculation period within 30 days or
within such shorter period as may be
required by HUD. Borrower shall be
deemed to have taken distributions to
the extent that surplus cash is negative
unless, in conjunction with the
calculation of surplus cash, borrower
provides to HUD documentation
evidencing, to HUD’s reasonable
satisfaction, a lesser amount of total
distributions. To the extent that the
provisions of this paragraph (a) are
inconsistent with the provisions in a
borrower’s existing transactional loan
documents, including without
limitation any HUD-required regulatory
agreement, the provisions of the
transactional loan documents shall
apply.

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(b) Definition. Borrower surplus cash
means any cash remaining in the
Borrower’s accounts after:
(1) The payment of:
(i) All sums due or currently required
to be paid under the terms of any
mortgage or note insured or held by the
Secretary;
(ii) All amounts required to be
deposited in the project’s reserve fund
for replacements, long-term debt service
reserve account, or residual receipts
account; and
(iii) All project obligations of the
borrower other than the insured
mortgage, unless funds for payment are
set aside or deferment of payment has
been approved by the Secretary; and
(2) The segregation of:
(i) An amount equal to the aggregate
of all special funds required to be
maintained by the project, including the
long-term debt service escrow account;
(ii) Any tenant security deposits held;
and
(iii) All other accrued items payable
by borrower within 30 days after the
end of the annual or semi-annual fiscal
period for which surplus cash is
calculated.
§ 232.256

Leases.

A borrower may not lease any portion
of the project or enter into any other
agreement with an operator without
HUD’s prior written consent.
15. Revise the introductory text of
§ 232.903, and § 232.903(c) and (d) to
read as follows:
§ 232.903

Maximum mortgage limitations.

Notwithstanding the maximum
mortgage limitations set forth in
§ 200.15 of this chapter, a mortgage
within the limits set forth in this section
shall be eligible for insurance under this
subpart.
*
*
*
*
*
(c) Project to be refinanced—
additional limit. (1) In addition to
meeting the requirements of paragraphs
(a) and (b) of this section, if the Project
is to be refinanced by the insured
mortgage, the maximum mortgage
amount must not exceed the cost to
refinance the existing indebtedness. For
the purposes of this requirement:
(i) The Project shall not have changed
ownership, or
(ii) The Project shall have been sold
to a purchaser who has an identity of
interest with the seller (as defined by
the Commissioner).
(2) The existing indebtedness will
consist of the following items, the
eligibility and amounts of which must
be determined by the Commissioner:
(i) The amount required to pay off the
existing indebtedness;

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(ii) The amount of the initial deposit
for the reserve fund for replacements;
(iii) Reasonable and customary legal,
organization, title, and recording
expenses, including mortgagee fees
under § 232.15;
(iv) The estimated repair costs, if any;
(v) Architect’s and engineer’s fees,
municipal inspection fees, and any
other required professional or
inspection fees;
(vi) The amount of any debt service
reserve account required by the
Commissioner.
(d) Project to be acquired—additional
limit. In addition to meeting the
requirements of paragraphs (a) and (b) of
this section, if the project is to be
acquired by the borrower and the
purchase price is to be financed with
the insured mortgage, the maximum
amount must not exceed 85 percent for
a profit-motivated borrower and 90
percent for a private nonprofit borrower
of the cost of acquisition as determined
by the Commissioner. The cost of
acquisition shall consist of the following
items, to the extent that each item
(except for item numbered (1)) is paid
by the purchaser separately from the
purchase price. The eligibility and
amounts of these items must be
determined in accordance with
standards established by the
Commissioner.
(1) Purchase price is indicated in the
purchase agreement;
(2) An amount for the initial deposit
to the reserve fund for replacements;
(3) Reasonable and customary legal,
organizational, title, and recording
expenses, including mortgagee fees
under § 232.15;
(4) The estimated repair cost, if any;
(5) Architect’s and engineer’s fees,
municipal inspection fees, and any
other required professional or
inspection fees;
(6) The amount of any debt service
reserve account required by the
Commissioner.
16. Add new subpart F to read as
follows:
Subpart F—Eligible Operators and Facilities
and Restrictions on Fund Distributions
Sec.
232.1001 Scope.
232.1003 Definitions.
232.1005 Treatment of project operating
accounts.
232.1007 Operating expenses.
232.1009 Payments to borrower principals
prohibited.
232.1011 Financial reports.
232.1013 Leases.
232.1015 Management agents.
232.1017 Restrictions on deposit,
withdrawal, and distribution of funds,
and repayment of advances.

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232.1019 Prompt notification to HUD and
mortgagee of circumstances placing the
value of the security at risk.

Subpart F—Eligible Operators and
Facilities and Restrictions on Fund
Distributions
§ 232.1001

Scope.

This subpart establishes requirements
applicable to the operators of healthcare
facilities and the facilities under this
part.
§ 232.1003

Definitions.

healthcare facility shall be deposited
into a federally insured bank account in
the name of the single asset operator of
the facility, provided that an account
held in an institution acceptable to the
Government National Mortgage
Association may have a balance that
exceeds the amount to which such
insurance is limited. If the borrower is
not also the operator, any of owner’s
project-related funds shall be deposited
into a federally insured bank account in
the name of the single asset borrower.
(b) An operator must not allow funds
attributable to the healthcare facility to
be commingled with funds attributable
to another healthcare facility or any
other business unless approved by HUD.
Any centralized accounting system
involving project funds must have prior
HUD approval and must clearly
delineate which portion of the funds in
an account are attributable to the
particular facility.
(c) Except to the extent that the
healthcare facility maintains positive
working capital, an operator may not
advance or otherwise use funds
attributable to the operator’s business at
a project under this part to pay expenses
attributable to any other project or
business without the advance written
approval of HUD.

The following definitions apply
throughout this part.
Identity-of-interest projects refers to
those projects that are operated by a
licensed operator and/or managed by a
management agent who shares an
identity of interest with the ownership
entity.
Management agent means an entity
that, pursuant to a contract with the
operator or borrower, manages matters
related to the project, subject to
limitations set forth in § 232.1015.
Operator means a single asset entity
acceptable to the Commissioner, and
shall possess the powers necessary and
incidental to operating the healthcare
facility, except that the Commissioner
may approve a non-single asset entity
under such circumstances, terms, and
conditions determined and specified as
acceptable to the Commissioner.
Owner operator means an owner who
operates its own project and does not
lease the project or otherwise contract
with an eligible operator. In that
instance, the borrower entity and the
operating entity are the exact same legal
entity, and the owner operator must
comply with regulatory provisions
governing the use of funds for both
operators and borrowers in § 232.254,
§ 232.1005, and § 232.1017.
Project means any and all assets of
whatever nature or wherever situated
related to the insured mortgage loan,
including without limitation the
mortgaged property, any site
improvements, and any collateral
owned by operators securing the
insured mortgage loan.

§ 232.1007

§ 232.1005
accounts.

§ 232.1011

Treatment of project operating

(a) All accounts deriving from the
operation of the property, including
operator accounts and including all
funds received from any source or
derived from the operation of the
facility, are project assets subject to
control under the insured mortgage
loan’s transactional documents,
including, without limitation, the
operator’s regulatory agreement. Funds
generated by the operation of the

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Operating expenses.

Goods and services purchased or
acquired in connection with the Project
shall be reasonable and necessary for
the operation or maintenance of the
Project, and the costs of such goods and
services incurred by the borrower or
operator shall not exceed amounts
normally paid for such goods or services
in the area where the services are
rendered or the goods are furnished,
except as otherwise approved by HUD.
§ 232.1009 Payments to borrower
principals prohibited.

No principal of the borrower entity
may receive a salary or any payment of
funds derived from operation of the
project, other than from permissible
distributions, except as approved by
HUD.
Financial reports.

Within 90 days following the end of
each entity’s fiscal year, the borrower
must provide HUD an audited annual
financial report based on an
examination of its books and records, in
such form and substance required by
HUD in accordance with 24 CFR 5.801
and 200.36. Operators must submit
financial statements quarterly within 30
days of the date of the end of each fiscal
quarter, setting forth both quarterly and

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Federal Register / Vol. 77, No. 86 / Thursday, May 3, 2012 / Proposed Rules
fiscal year-to-date information in
accordance with 24 CFR 5.801(c)(4).
§ 232.1013

Leases.

Except to enter into resident
agreements in the standard course of
operating the healthcare facility, an
operator may not lease or sublease any
portion of the project without HUD’s
prior written approval.
§ 232.1015

Management agents.

(a) An operator or borrower may, with
the prior written approval of HUD,
execute a management agent agreement
setting forth the duties and procedures
for matters related to the management of
the project. Both the management agent
and the management agent agreement
must be acceptable to HUD and
approved in writing by HUD.
(b) An operator or borrower may not
enter into any agreement that provides
for a management agent to have rights
to or claims on funds owed to the
operator.
(c) Management agent fees may not be
renegotiated without HUD’s written
approval once the management agent
agreement has been executed.
(d) HUD may approve an identity of
interest between a management agent
and a borrower or operator only to the
extent that the goods and services
provided benefit the project and if the
operator clearly establishes that the
amounts paid to the identity-of-interest
management agent for goods and
services provided to the healthcare
facility are not in excess of amounts that
would be charged by an independent
management agent.

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§ 232.1017 Restrictions on deposit,
withdrawal, and distribution of funds, and
repayment of advances.

(a) Deposit of funds. An operator must
deposit all revenue the operator receives
directly or indirectly in connection with
the operation of the healthcare facility
in a separate, segregated account. The
account must be with a financial
institution whose deposits are insured
by an agency of the Federal
Government, provided that an account
held in an institution acceptable to the
Government National Mortgage
Association may have a balance that
exceeds the amount to which such
insurance is limited.
(b) Withdrawals of funds. Operators,
whether or not an operator is also the
borrower, shall at all times maintain
positive working capital for the
healthcare facility. If a quarterly
financial statement, required pursuant
to § 232.1011, demonstrates negative
working capital for the healthcare
facility, the operator must cure such

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violation or HUD may pursue such
remedies as set forth in the insured
mortgage loan’s transactional
documents.
§ 232.1019 Prompt notification to HUD and
mortgagee of circumstances placing the
value of the security at risk.

(a) HUD and the mortgagee shall be
informed of any notification of any
failure to comply with governmental
requirements including the following:
(1) The licensed operator of a project
shall promptly provide the mortgagee
and HUD with a copy of any notification
that has placed the licensure, a provider
funding source, and/or the ability to
admit new residents at risk, and any
responses to those notices, provided
that HUD may determine certain
information to be exempt from this
requirement based upon severity level.
Such required information shall
include, but is not limited to, the
following types of notices and
responses:
(i) The operator shall deliver to HUD
and the mortgagee electronically, within
48 hours after the date of receipt, copies
of any and all notices, reports, surveys,
and other correspondence (regardless of
form) received by the operator from any
governmental authority that includes
any statement, finding, or assertion that:
(A) The operator or the project is or
may be in violation of (or default under)
any of the permits and approvals or any
governmental requirements applicable
thereto;
(B) Any of the permits and approvals
is to be terminated, limited in any way,
or not renewed;
(C) Any civil money penalty (other
than a de minimis amount) is being or
may be imposed; or
(D) The operator or the project is
subject to any governmental
investigation or inquiry involving fraud.
(ii) The operator shall also deliver to
HUD and the mortgagee, simultaneously
with delivery to any governmental
authority, any and all responses given
by or on behalf of the operator to any
of the foregoing and shall provide to
HUD and the mortgagee, promptly upon
request, such additional information
relating to any of the foregoing as HUD
or the mortgagee may request. The
receipt by HUD and/or the mortgagee of
notices, reports, surveys,
correspondence, and other information
shall not in any way impose any
obligation or liability on HUD, the
mortgagee, or their respective agents,
representatives, or designees to take (or
refrain from taking) any action; and
HUD, the mortgagee, and their
respective agents, representatives, and
designees shall have no liability for any

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26229

failure to act thereon or as a result
thereof.
(2) The operator shall provide
additional and ongoing information as
requested by the borrower, mortgagee,
or HUD pertaining to matters related to
that risk. Controlling documents
between or among any of the parties
may provide further requirements with
respect to such notification and
communication.
(b) This section is applicable to all
operators on the effective date of this
regulation.
Dated: April 12, 2012.
Carol J. Galante,
Acting Assistant Secretary for Housing—
Federal Housing Commissioner .
[FR Doc. 2012–10690 Filed 5–2–12; 8:45 am]
BILLING CODE 4210–67–P

DEPARTMENT OF DEFENSE
Department of the Army, Corps of
Engineers
33 CFR Part 334
Meloy Channel, U.S. Coast Guard Base
Miami Beach, FL; Restricted Area
United States Army Corps of
Engineers, Department of Defense.
ACTION: Notice of proposed rulemaking
and request for comments.
AGENCY:

The U.S. Army Corps of
Engineers (Corps) is proposing to amend
its regulations to establish a new
restricted area in the waters surrounding
the U.S. Coast Guard Base Miami Beach,
Florida (Base Miami Beach). Base Miami
Beach is composed of multiple U.S.
Coast Guard (USCG) units, both land
and waterside. The facility has one of
the highest operational tempos in the
USCG for both routine and emergency
operations. The amendment to the
regulations is necessary to enhance the
USCG’s ability to secure their shoreline
to counter postulated threats against
their personnel, equipment, cutters and
facilities by providing stand-off
corridors encompassing the waters
immediately contiguous to Base Miami
Beach. The amendment will also serve
to protect the general public from injury
or property damage during routine and
emergency USCG operations and
provide an explosive safety arc buffer
during periodic transfer of ammunitions
between units, including cutters.
DATES: Written comments must be
submitted on or before June 4, 2012.
ADDRESSES: You may submit comments,
identified by docket number COE–
2012–0009, by any of the following
methods:
SUMMARY:

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