Published Proposed Rule – Project Approval for Single-Family Condos

Federal Register / Vol. 81, No. 188 / Wednesday, September 28, 2016 / Proposed Rules
general population, or should they
include those nutrients that contribute
to general overall health? Should the
nutrients be intrinsic to the foods, or
could they be provided in part—or in
total—via fortification? Please provide
details of your reasoning and provide
any supportive data or information.
• Are there current dietary
recommendations (e.g., the Dietary
Guidelines for Americans) or nutrient
intake requirements, such as those
described in the final rule updating the
Nutrition Facts label (see 81 FR 33742;
May 27, 2016) or those provided by the
Institute of Medicine (IOM) in the form
of Dietary Reference Intakes (DRI)
(http://www.nationalacademies.org/
hmd/Activities/Nutrition/
SummaryDRIs/DRI-Tables.aspx), that
should be reflected in criteria for use of
the term ‘‘healthy?’’
• What are the public health benefits,
if any, of defining the term ‘‘healthy’’ or
other similar terms in food labeling?
Please include any data or research
related to public health benefits in your
reasoning.
• What is consumers’ understanding
of the meaning of the term ‘‘healthy’’ as
it relates to food? What are consumers’
expectations of foods that carry a
‘‘healthy’’ claim? We are especially
interested in any data or other
information that evaluates whether or
not consumers associate, confuse, or
compare the term ‘‘healthy’’ with other
descriptive terms and claims.
• Would this change in the term
‘‘healthy’’ cause a shift in consumer
behavior in terms of dietary choices?
For example, would it cause a shift
away from purchasing or consuming
fruits and vegetables that do not contain
a ‘‘healthy’’ claim and towards
purchasing or consuming processed
foods that bear this new ‘‘healthy’’
claim?
• How will the food industry and
consumers regard a change in the
definition of ‘‘healthy?’’
• What would be the costs to industry
of the change?
Please provide supporting data,
consumer research, and other
information to support your comments
and responses to these questions.
sradovich on DSK3GMQ082PROD with PROPOSALS

III. References
The following reference is on display
in the Division of Dockets Management
(see ADDRESSES) and is available for
viewing by interested persons between
9 a.m. and 4 p.m., Monday through
Friday; it is also available electronically
at http://www.regulations.gov. (FDA has
verified the Web site address, as of the
date this document publishes in the

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Federal Register, but Web sites are
subject to change over time.)
1. U.S. Department of Health and Human
Services and U.S. Department of
Agriculture. 2015–2020 Dietary
Guidelines for Americans, 8th Edition,
December 2015, available at http://
health.gov/dietaryguidelines/2015/
guidelines/.
Dated: September 23, 2016.
Leslie Kux,
Associate Commissioner for Policy.
[FR Doc. 2016–23365 Filed 9–27–16; 8:45 am]
BILLING CODE 4164–01–P

DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
24 CFR Parts 203 and 234
[Docket No. FR–5715–P–01]
RIN 2502–AJ30

Project Approval for Single-Family
Condominiums
Office of the Assistant
Secretary for Housing—Federal Housing
Commissioner, HUD.
ACTION: Proposed rule.
AGENCY:

This proposed rule would
implement HUD’s authority under the
single-family mortgage insurance
provisions of the National Housing Act
to insure one-family units in a
multifamily project, including a project
in which the dwelling units are
attached, or are manufactured housing
units, semi-detached, or detached, and
an undivided interest in the common
areas and facilities which serve the
project. The rule would codify
requirements for Direct Endorsement
lenders to meet in order to be approved
for the Direct Endorsement Lender
Review and Approval Process (DELRAP)
authority for condominiums, and basic
standards that projects must meet to be
approved as condominiums in which
individual units would be eligible for
mortgage insurance, as well as
particular cases such as Single-Unit
Approvals and site condominiums. The
rule provides a method by which certain
approval standards could be varied
efficiently to meet market needs while
providing for public comment where
appropriate. Currently, single-family
condominium project approval is
provided under HUD’s Condominium
Project Approval and Processing Guide
and related Mortgagee Letters.
Condominiums under this rule are
distinct from condominiums in which
the project has a blanket mortgage
insured by HUD.

SUMMARY:

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Comment due date: November
28, 2016.
ADDRESSES: 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.
DATES:

Note: To receive consideration as public
comments, comments must be submitted
through one of the two methods specified
above. Again, all submissions must refer to
the docket number and title of the rule.

No Facsimile Comments. Facsimile
(fax) comments are not acceptable.
Public Inspection of Public
Comments. HUD will make all properly
submitted comments and
communications 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, you must
schedule an appointment in advance to
review the public comments 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 toll-free Federal
Relay Service at 800–877–8339. Copies
of all comments submitted are available
for inspection and downloading at
www.regulations.gov.

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Federal Register / Vol. 81, No. 188 / Wednesday, September 28, 2016 / Proposed Rules

FOR FURTHER INFORMATION CONTACT:

Elissa Saunders, Director, Office of
Single Family Program Development,
Office of Housing, Department of
Housing and Urban Development, 451
7th Street SW., Washington, DC 20410–
8000; telephone number 202–708–2121
(this is not a toll-free number). Hearingand 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

sradovich on DSK3GMQ082PROD with PROPOSALS

A. Prior Authority—Section 234 of the
National Housing Act
Prior to 2008, HUD’s statutory
authority to insure mortgages on
condominium units came from section
234 of the National Housing Act (12
U.S.C. 1715y) (the Act). Section 234
required that: The structure is or has
been covered by a mortgage insured
under another section of the Act; the
mortgagor is acquiring or has acquired
a family unit covered by a section 234
insured mortgage for his own use and
occupancy; and the mortgagor will not
own more than four one-family units
covered by section 234 insured
mortgages (Pub. L. 87–70, June 30, 1961,
75 Stat. 161). Subsequent amendments
allowed for a variety of project
configurations in addition to vertical
buildings (Pub. L. 97–35, August 13,
1981, 95 Stat. 416); added an 80 percent
mortgagor occupancy requirement; and
removed the 4-unit limitation on
ownership (Pub. L. 98–181, November
30, 1983, 97 Stat. 1209).
The Housing and Economic Recovery
Act of 2008, Public Law 110–289, July
30, 2008 122 Stat. 2654 (HERA) was
enacted July 30, 2008 and added a
requirement to section 234(c) that the
project have a blanket mortgage insured
by the Secretary under section 234(d).
HUD does not currently insure new
mortgages on condominium units in
projects with blanket mortgages.
Although, there are existing mortgages
that were previously insured under
section 234, most condominium projects
are not structured in this manner.
B. HERA of 2008 and Section 203 of the
National Housing Act
Section 2117 of Division B, Title I,
Subtitle A of HERA, the FHA
Modernization Act of 2008, amended
the National Housing Act to provide
authority for HUD to insure
condominium units under the singlefamily program authorized by section
203 of the National Housing Act, 12
U.S.C. 1709. Specifically, section 2117
amended the definition of ‘‘mortgage’’

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in section 201 of the Act (12 U.S.C.
1707), which definition also applies to
section 203 of the Act (12 U.S.C. 1709),
to include a mortgages on a one-family
unit in a multifamily project, and an
undivided interest in the common areas
and facilities which serve the project.
The HERA changes placed all authority
for mortgage insurance of projects with
blanket mortgages in section 234 of the
Act, and units in other condominium
projects under section 203 of the Act.
C. Current Regulations and Guidance
Project approval for projects with
FHA-insured blanket loans are governed
according to the requirements of section
234 of the Act, 24 CFR part 234, and
other applicable policy guidance,
including the Condominium Project
Approval and Processing Guide (the
Guide).
II. This Proposed Rule
This proposed rule would codify
basic regulatory requirements for
condominium project approval, in
addition to the current requirements
under 24 CFR part 203. These
requirements would be more flexible,
less prescriptive, and more reflective of
the current market than the
requirements in the current section 234
program. The intent of this rule is to
regulate where necessary to ensure
financial soundness and project
viability, but to be flexible where
possible, and retain the ability to be
responsive to the market.
The rule proposes a new 24 CFR 203.8
that would codify DELRAP for
condominiums. While a similar process
is currently outlined in chapter 1.2 of
the Guide, this rule is proposing some
changes based on HUD’s experience. As
now proposed, in order to participate in
condominium project approval, a
mortgagee would have to be granted
DELRAP authority, and in order to be
granted DELRAP authority, a mortgagee
would have to be unconditionally
approved for the Direct Endorsement
program as provided in § 203.3, and
additionally have the following indicia
of capability in underwriting
condominium mortgages specifically:
Staff with at least one year experience
in underwriting mortgages on
condominiums and/or condominium
project approval; having originated not
less than 10 condominium loans in
HUD-approved projects; having an
acceptable quality control plan that
includes provisions specific to DELRAP;
and ensuring that only staff members
with the required experience participate
in condominium project approval using
DELRAP (proposed § 203.8(b)).

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Under proposed § 203.8(b)(2) and
(b)(3), mortgagees would initially be
granted conditional DELRAP authority
upon providing a notice of their intent
to participate in DELRAP. While
conditionally approved, a mortgagee
must submit all recommended
Condominium Project approvals and
denials to FHA for review, and may
only proceed upon notification of
HUD’s agreement with the
recommendation. Once the mortgagee
has completed at least 5 DELRAP
reviews to HUD’s satisfaction, the
mortgagee will be granted unconditional
DELRAP authority and may approve
condominium projects in accordance
with HUD’s requirements.
Section 203.8(c) would provide for
HUD’s review of a DELRAP mortgagee’s
performance. HUD will monitor the
performance on an ongoing basis, and,
if there are no material deficiencies
found, HUD will select a sample of
project approvals, denials, or
recertifications for post-action review. If
the review shows deficiencies and the
mortgagee has unconditional DELRAP
authority, the mortgagee may be
returned to conditional status. If
additional reviews continue to show
deficiencies, the mortgagee authority to
participate in DELRAP may be
terminated, or other action taken against
the staff reviewer, under proposed
§ 203.8(d), which includes any action
available under 24 CFR 203.3(d).
Sections 203.8(d) and (e) provide for
termination of DELRAP authority and
requests for reinstatement of terminated
authority. HUD may immediately
terminate DELRAP authority or take
actions under § 203.3(d) if the mortgagee
violates any of the requirements and
procedures established by the Secretary
for mortgagees approved to participate
in DELRAP, the Direct Endorsement
program, or the Title II Single Family
mortgage insurance program; or if other
good cause exists; or for unacceptable
performance. Actions under 24 CFR
203.3(d) include probation of Direct
Endorsement lenders subject to
conditions including additional training
and changes to the mortgagee’s quality
control plan, or termination of Direct
Endorsement approval. Termination of
DELRAP authority would be effective
upon the mortgagee’s receipt of HUD’s
notice advising of the termination. Any
termination of DELRAP authority is a
separate action from an action for
withdrawal of mortgagee approval by
the Mortgagee Review Board, which
could also be initiated by HUD.
Under proposed § 203.8(e), a
mortgagee whose DELRAP authority is
terminated under this section may
request reinstatement if the mortgagee’s

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Federal Register / Vol. 81, No. 188 / Wednesday, September 28, 2016 / Proposed Rules
DELRAP authority has been terminated
for at least 6 months. The request must
address the eligibility criteria for
participation in DELRAP under this rule
as well as a corrective action plan, along
with evidence that the mortgagee has
implemented the corrective action plan.
Following the request, HUD would be
able to grant Conditional DELRAP
authority if the mortgagee’s application
is complete and the Commissioner
determines that the underlying causes
for the termination have been
satisfactorily remedied. The mortgagee
would be required to complete
successfully at least 5 test cases in
accordance with § 203.8(b)(3) in order to
receive unconditional DELRAP
authority.
The rule proposes a minor change to
current § 203.17(a)(1), which section
defines ‘‘mortgage’’ in accordance with
section 201 of the National Housing Act
(12 U.S.C. 1707), but has not been
updated to account for the addition of
mortgages on one-family units in
multifamily projects and an undivided
interest in the common areas and
facilities. Nor does the current
regulatory definition include detached
and semi-attached units. By revising
this section to cross-reference section
201 of the National Housing Act rather
than attempting to summarize it, HUD
avoids the need to update this definition
each time the statutory definition is
revised, and eliminates confusion that
may be caused by differences between
the statutory language and HUD’s
regulation.
This rule proposes to revise currently
reserved § 203.43b to include the
regulations pertaining to the eligibility
of projects for approval and for
condominium units in approved
projects for mortgage insurance.
Section 203.43b(a) would provide
definitions of the terms Condominium
Project, Condominium Unit, Rental for
Transient or Hotel Purposes,
Condominium Association, Single-Unit
Approval, and Site Condominium under
part 203. While Condominium Unit
refers to a one-family unit in a
multifamily project, including a project
in which the dwelling units are
attached, or are manufactured housing
units, semi-detached, or detached, and
an undivided interest in the common
areas and facilities that serve the
project, the term Condominium Project
refers to the project as a whole in which
such units are located. The term Rental
for Transient or Hotel Purposes crossreferences to section 513(e) of the Act
(12 U.S.C. 1731b(e)). Single-Unit
Approval means approval of a loan on
a single unit in a project that is not
approved as a condominium. The term

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Site Condominium means a single
family totally detached dwelling (which
does not have a shared garage or any
other attached building, including such
improvements as archways, or
breezeways), which is encumbered by a
declaration of condominium covenants
or condominium form of ownership,
and which consists of the entire
structure as well as the site and air
space and is not considered to be a
common area or limited common area.
Section 203.43b(b) would state that a
mortgage on a Condominium Unit shall
be eligible for insurance under section
203 of the National Housing Act if it
meets the requirements of 24 CFR part
203, subpart A, except as provided for
in § 203.43b. Section 203.43b(c) would
further specify that the unit, to be
eligible for insurance under § 203.43b,
must be located in a Condominium
Project approved by HUD or DELRAP
mortgagee approved under 24 CFR
203.8, or meet the additional
requirements for approval as a Site
Condominium or Single-Unit Approval.
Under this rule, HUD and DELRAP
lenders will not approve proposed or
under construction projects; however,
HUD or DELRAP lenders may approve
legal phases of projects or completed
projects. The condominiums that may
be approved under this rule would be
those where the work on the project or
legal phase, including buildings and
infrastructure of the project or legal
phase, is fully complete. HUD would
expect that all the requirements of local
law would be met, including review and
approval of the project or legal phase by
the local jurisdiction and recordation in
the property records of the
condominium plat or development plan,
as applicable (see §§ 203.43b(d)(4) and
(d)(5)).
Section 203.43b(d) would state the
basic condominium project approval
eligibility requirements. The project or
legal phase must be complete as to
construction of the buildings and
infrastructure. In addition, any legal
phases must be contiguous (in a vertical
building) or must consist of adjoining or
contiguous homes (in a development of
detached or semi-detached homes), and
the units or buildings and infrastructure
in each phase must be constructed and
be complete. The project or legal phase
must also be primarily residential in
nature (although a certain amount of
floor space may be set aside for
commercial activities, as stated at
§ 203.43b(d)(6)(vii)) and not intended
for transient or hotel purposes; must
consist solely of one-family units, which
is a statutory requirement under 12
U.S.C. 1707(a); and must be in full
compliance with all Federal, State, and

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local laws with respect to zoning, Fair
Housing, and accessibility for persons
with disabilities, including but not
limited to the Fair Housing Act, 42
U.S.C. 3601 et seq., Section 504 of the
Rehabilitation Act, 29 U.S.C. 794, and
the Americans with Disabilities Act, 42
U.S.C. 12101 et seq., where relevant.
Infrastructure includes the project’s
streets, storm water management, water
and sewage systems, and utilities, along
with the project’s common elements and
amenities, such as parking lots,
community buildings, swimming pools,
golf courses, playgrounds, and any
similar items, called for in the project or
legal phase.
In addition to these general
requirements, condominiums must meet
further approval requirements as
provided by HUD. Some of these
requirements are underwriting matters
or existing legal requirements such as
the nature of the real estate title or
leasehold; unit owner control of the
Condominium Association; insurance
coverage; and statements regarding
financial condition, special assessments,
property conditions, and pending legal
actions. These are the types of matters
that HUD routinely considers when
determining eligibility for FHA
programs.
In addition, the rule would
implement some regulatory standards
specific to condominiums, but seeks to
do so in a way that is flexible and
responsive to the market while
continuing to involve the public in the
rulemaking process. Section
203.43b(d)(6)(vii) would provide for
HUD to set a standard for the maximum
commercial/nonresidential space within
a range from 25 percent to 60 percent of
the total floor area. Mixed-use
developments are a way to integrate
housing, land-use, economic and
workforce development, as well as
transportation and infrastructure
development. However, the agency
believes that allowing greater than 50
percent commercial/nonresidential
space may have a negative impact on
the residential character of the project;
therefore, HUD would not expect in the
near future to allow greater than 50
percent commercial/nonresidential
space. HUD may want to allow less
based on the experience it gains with
this program.
Under 12 U.S.C. 1709(y)(2),1 either
HUD or the DELRAP lender, at the
option of the requester, may grant an
exception to the standard regarding the
maximum percentage of commercial/
1 As amended by the Housing Opportunity
Through Modernization Act of 2016, Public Law
114–201 (approved July 29, 2016).

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Federal Register / Vol. 81, No. 188 / Wednesday, September 28, 2016 / Proposed Rules

nonresidential space set by HUD. In
determining whether to grant such an
exception, factors relating to the
economy for the locality in which the
condominium project is located, or
specific to the project, including the
total number of family units in the
project, shall be considered. A DELRAP
lender, in determining whether to grant
a requested exception, shall follow any
procedures that HUD may establish.
Within this range, in order to remain
flexible and responsive to the market,
HUD would be able to vary by notice the
percentage of commercial/
nonresidential space allowed or
required. If HUD decides to vary the
upper and lower limits of the range
itself, the rule provides a procedure that
includes notice and an opportunity for
public comment. This notice and
comment procedure is stated at
§ 203.43b(e) of this proposed rule.
Sections 203.43b(d)(6)(viii) and
(d)(6)(ix) would treat acceptable
maximum percentages of units with
FHA-insured mortgages and acceptable
minimum levels of owner occupancy,
respectively, in a similar manner, with
overall ranges between 25 and 75
percent, within which HUD would be
able to vary the amount by notice. The
owner occupancy percentage includes
both principal and secondary residences
(or units that have been sold to
purchasers who intend to occupy them
as primary or secondary residences).
Secondary residences are defined at
§ 203.18(f)(2), mean dwellings (i) Where
the mortgagor maintains or will
maintain a part-time place of abode and
typically spends (or will spend) less
than a majority of the calendar year; (ii)
which is not a vacation home; and (iii)
which the Commissioner has
determined to be eligible for insurance
in order to avoid undue hardship to the
mortgagor. A person may have only one
secondary residence at a time.
While having too few owner
occupants can detract from the viability
of a project, requiring too many can
harm its marketability. HUD’s current
standard of 50 percent has worked in
the recent market; however, HUD
specifically invites comment on this
issue. For these elements as well, the
procedure to change the upper and
lower limits of the range itself by notice
with an opportunity to comment would
apply.
Section 203.43b(d)(6)(x) addresses
phasing of a project. While HUD
understands that developing projects in
phases as funding is secured may be
necessary in some cases, HUD is
concerned about the risk of approving
phases in cases where failure to
complete a phase could result in the

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failure of the project as a whole.
Therefore, only legal phasing will be
allowed. All phases must be contiguous
and constructed so that they are
separately sustainable, meet the
requirements of § 203.43b(d), and be
capable of being occupied even if a
subsequent phase were to be delayed or
even fail to be completed.
Section 203.43b(d)(6)(xi) addresses
reserve accounts. Per HUD’s usual
practice, this rule would require that the
reserve account is funded with at least
10 percent of the monthly unit
assessments, unless a lower amount is
deemed acceptable by HUD based on a
reserve study completed not more than
24 months before a request for a lower
amount is received.
Section 203.43b(d)(6)(xii) permits
HUD to set requirements regarding such
other matters that may affect the
viability or marketability of the project
or its units. Additionally, under
proposed § 203.43b(f), the Secretary may
grant case by case exceptions to the
regulatory requirements under
§ 203.43b(d)(6). This is in accordance
with the discretionary nature of the
Secretary’s authority to insure
mortgages under 12 U.S.C. 1709(a).
Proposed 203.43b(g) provides the
basic mechanism for condominium
approval. Condominiums would be
submitted to either HUD or a DELRAP
lender, and, if all eligibility criteria are
met, would be approved and placed on
the list of HUD-approved condominium
projects. Under § 203.43b(g)(3), unless
otherwise specified in writing by HUD,
approval would be for a period of 3
years from the date of placement on the
approved list; HUD may rescind
approval at any time if the project fails
to comply with any requirement for
approval.
Proposed 203.43b(g)(4) provides for
renewal of a project approval. The
condominium could request renewal, by
submitting a request for recertification
no earlier than 6 months before, and no
later than 6 months after, expiration of
the approval. As long as the request is
timely, it may be supported by updating
previously submitted information,
rather than by resubmitting new
information. However, if the request is
not submitted by the end of 6 months
after the expiration of approval, a
complete, new approval application
would be required. HUD will specify the
format for the request.
Proposed 203.43b(h) would provide
overall parameters for Single-Unit
Approval, that is, approvals of
individual units in projects that are not
otherwise approved to participate. A
mortgage secured by a Single-Unit
Approval may be acceptable if the

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percentage of such mortgages insured in
a project is within an amount
determined by the Secretary to be
necessary for the viability and
marketability of the project, which
percentage, within the range established
in this rule, will be specified by HUD by
notice. In addition, the unit may only be
eligible for approval on a Single-Unit
Approval basis if it is not located in a
Condominium Project that is approved
under this section or has been subject to
a negative determination for significant
issues that affect the viability of the
project. The project must be complete
(i.e., not proposed, under construction,
or subject to further phasing or
annexation), including all common
elements and those of the master
association. The project must have a
percentage of units sold within a range
stated in the rule, with the specific
percentage to be established by HUD
through notice. Finally, the Single-Unit
Approval must be in a project in which
no single entity owns more than the
percentage of units in the project that is
within the range stated in rule, with the
specific percentage to be established by
HUD through notice. If HUD determines
it is necessary to change the upper and
lower limits of the ranges, it will issue
a notice for comment.
Proposed § 203.43b(i) would govern
site condominiums. Insurance and
maintenance costs must be the sole
responsibility of the owner, and any
common assessments collected must be
restricted to use solely for amenities
outside of the footprint of the individual
site.
Condominium units that meet the
statutory requirements of section 203(k)
of the Act, 12 U.S.C. 1709(k), are eligible
for rehabilitation loans. Section 203(k)
and the implementing HUD regulation
at 24 CFR 203.50(a)(1)(i) provides for
rehabilitation loans for 1–4 unit
structures that are primarily residential.
A rehabilitation loan for an individual
condominium unit under 203(k)
necessarily excludes the building
exterior and common elements, which
are the responsibility of the Association,
so that the 203(k) loan would be for the
portion of the structure that is inside the
unit including the installation of
firewalls in the attic of a unit (proposed
24 CFR 203.50(a)(1)(iv)).
In accordance with HUD’s
longstanding policy for 203(k)
rehabilitation loans secured by
condominium units, this proposed rule
would add a provision stating that the
maximum loan amount is 100 percent of
the after-improvement value of the unit
for any Condominium Unit. (proposed
24 CFR 203.50(f)(3)).

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Federal Register / Vol. 81, No. 188 / Wednesday, September 28, 2016 / Proposed Rules
Finally, the proposed rule would
address the continued applicability of
24 CFR part 234, which now applies,
along with section 234 of the Act (12
U.S.C. 1715y) and other HUD issuances
specific to part 234, only in cases where
projects have blanket mortgages insured
by HUD. This proposed rule adds a new
§ 234.2, entitled ‘‘Savings clause,’’
which clarifies that part 203 and this
section apply in all cases except where
the project has a blanket mortgage
insured under section 234(d) of the Act,
in which case section 234 of the Act, 24
CFR part 234, and other HUD issuances
(including HUD Handbook 4265.1,
Home Mortgage Insurance
Condominiums; Chapter 11 of HUD
Handbook 4150.1, Valuation Analysis
for Home Mortgage Insurance and any
Mortgagee Letters that discuss section
234 requirements) apply.
Requests for Public Comment
(1) HUD seeks public comment
specifically on the proposed
requirement in § 203.43b(d)(4) that the
project or legal phase be ‘‘complete and
ready for occupancy, including
completion of the infrastructure of the
project or legal phase, and not subject to
further rehabilitation, construction,
phasing, or annexation, except to the

extent that approval is sought for legal
phasing in compliance with the
requirements of paragraph (d)(6)(x) of
this section.’’ Given that HUD approval
of a fully completed project would not
require an environmental review, while
continuing the current practice of
approving proposed or under
construction projects could require
environmental review, HUD seeks
comments on how this rule would affect
industry participation in the program.
(2) HUD seeks public comment
specifically on whether there is some
other indicia of appropriate experience
that could be used rather than, or in
addition to, experience in underwriting
condominium mortgages and/or
condominium approval, or the number
of loans originated; for instance, is there
another type of experience that could
provide an indication of competency in
condominium project approval, and
how would it provide such indication?
(3) HUD seeks public comment
specifically on the ranges this rule
proposes to establish, within which
HUD may set the specific requirements
for percentages of Single-Unit
Approvals, commercial space, FHA
insured units, and owner-occupied
units. HUD seeks comment on whether
this range approach is the best
Number of
respondents

sradovich on DSK3GMQ082PROD with PROPOSALS

Information collection

Frequency
of response

approach, and whether the ranges
proposed are appropriate. The agency
would be interested in any data or
evidence that could be provided either
that the ranges, as proposed, are
appropriate, or that a different set of
ranges would be more appropriate or
would yield additional benefits.
(4) HUD seeks public comment
specifically on the proposed revision of
the period of project approval from 2 to
3 years, including whether there are any
costs and benefits that would be
associated with a shorter or longer
timeframe.
III. Findings and Certifications
Paperwork Reduction Act
The information collection
requirements contained in this 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 rule is estimated as
follows:
Total
annual
responses

Total
burden
hours

Hours per
response

Package Preparation ...........................................................
Package Review ..................................................................
Quality Assurance ................................................................

15,000
15,000
15,000

1
1
.2

15,000
15,000
3,000

2
1
1

30,000
15,000
3,000

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

45,000

2.2

33,000

4

48,000

In accordance with 5 CFR
1320.8(d)(1), HUD is soliciting
comments from members of the public
and affected agencies concerning this
collection of information to:
(1) Evaluate whether the proposed
collection of information is necessary
for the proper performance of the
functions of the agency, including
whether the information will have
practical utility;
(2) Evaluate the accuracy of the
agency’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.

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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–5563) and must be sent to:
HUD Desk Officer, Office of
Management and Budget, New
Executive Office Building,
Washington, DC 20503, Fax: (202)
395–6947;
and
Reports Liaison Officer, Office of Public
and Indian Housing, Department of
Housing and Urban Development,
Room, 451 7th Street SW.,
Washington, DC 20410.
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

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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.
Regulatory Planning and Review
OMB reviewed this proposed rule
under Executive Order 12866 (entitled
‘‘Regulatory Planning and Review’’).
This rule was determined to be a
‘‘significant regulatory action,’’ as
defined in 3(f) of the order (although not
an economically significant regulatory
action, as provided under section 3(f)(1)

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Federal Register / Vol. 81, No. 188 / Wednesday, September 28, 2016 / Proposed Rules

of the order). The docket file 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 7th Street SW.,
Room 10276, Washington, DC 20410–
0500.
The proposed rule establishes
regulations concerning three aspects of
the Direct Endorsement Lender Review
and Approval Process (DELRAP) for
single family condominiums. First, the
rule establishes parameters regarding
which kind of condominium projects
are eligible for approval for the purpose
of single unit mortgage insurance
through the Department of Housing and
Urban Development. Flexible approval
standard requirements, will allow for
projects to efficiently meet market
needs. Second, the rule changes the
frequency with which approved projects
need to be reapproved from two years to
three years. Third, the rule changes the
standards for condominium DELRAP
mortgagees in order to require minimum
experience and quality control levels.
The rule could result in multiple
transfers: Among lenders, among
condominium projects; and to FHA. The
benefit of the proposed rule is to
provide flexibility in implementation
providing competent lenders a role in
project approval. Costs arise from any
administrative burden imposed upon
the private sector or lost opportunities
resulting from condominium project
requirements. Many provisions of the
rule (Single-Unit Approval, flexible
standards, a longer interval for condo
approvals, and exceptions for
environmental review) will reduce or
eliminate the compliance costs of the
rule. The Regulatory Impact Analysis
discusses but does not monetize many
of the difficult to evaluate impacts.
Monetized annual impacts of the rule
include the estimated paperwork
burden of $2.1 million. HUD finds that
increasing the periodicity of approval
from 2 to 3 years reduces the costs of
approval by $1 million annually.
Greater detail and analysis than this
brief summary can provide is available
in the full initial Regulatory Impact
Analysis (RIA) prepared for this rule,
which is available for public inspection
in the Regulations Division and may be
viewed online at www.regulations.gov,
under the docket number above. 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

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via TTY by calling the Federal Relay
Service at (800) 877–8339.
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 the
private sector. This rule does not
impose any Federal mandate on any
state, local, or tribal government or the
private sector within the meaning of
UMRA.

originators (reverse, purchase,
refinance) include both brokers and
lenders. The firms that participate in
lending are divided among five primary
groups: Banks, thrifts, mortgage banks,
credit unions, and mortgage brokers. A
precise description of these individual
industries is as follows:
Commercial Banking (NAICS 522110)
Entities primarily engaged in
accepting demand and other deposits
and making commercial, industrial, and
consumer loans. Commercial banks and
branches of foreign banks are included.

Environmental Review
A Finding of No Significant Impact
with respect to the environment has
been made in accordance with HUD
regulations in 24 CFR part 50 that
implement section 102(2)(C) of the
National Environmental Policy Act of
1969 (42 U.S.C. 4332(2)(C)). The
Finding is available for public
inspection during regular business
hours in the Regulations Division,
Office of General Counsel, Department
of Housing and Urban Development,
451 7th Street SW., Room 10276,
Washington, DC 20410–0500. Due to
security measures at the HUD
Headquarters building, 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
number via TTY by calling the Federal
Relay Service at (800) 877–8339.

Savings Institutions (NAICS 522120)
Entities primarily engaged in
accepting time deposits, making
mortgage and real estate loans, and
investing in high-grade securities.
Savings and loan associations and
savings banks are included in this
industry.

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 proposed
rule establishes regulations for singlefamily mortgage insurance of
condominium units pursuant to 12
U.S.C. 1707 and 1709. However, HUD
has been providing mortgage insurance
for this purpose pursuant to statute and
the Condominium Approval and
Processing Guide published in 2011.
While this rule makes some adjustments
to the provisions on eligibility for
DELRAP participation, and many
DELRAP lenders are small entities, this
rule is not so different as to create a
significant economic impact.

Mortgage and Nonmortgage Loan
Brokers (NAICS 522310)
Entities primarily engaged in
arranging loans by bringing borrowers
and lenders together on a commission or
fee basis.
During the 1980s and 1990s, mortgage
lending evolved from the traditional
portfolio lender model where single
companies (bank and thrift depositories)
performed all steps in the mortgage
process—making, closing, funding,
servicing, and holding the loan—to a
more specialized industry of originators,
funding lenders, warehouse lenders,
separate secondary market buyers of
loans, and servicers.2 A major driving
force behind the unbundling of the
mortgage functions, as well as the rise
of mortgage brokers, has been the rise
and eventual dominance of mortgage
securitization, which separated the
provision of capital from loan
origination and servicing. Brokers

A. Industry Sector Data Analysis
Industries involved in mortgage
origination and lending. Mortgage

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Credit Unions (NAICS 522130)
Entities primarily engaged in
accepting members’ share deposits in
cooperatives that are organized to offer
consumer loans to their members.
Real Estate Credit (NAICS 522292)
Entities primarily engaged in lending
funds with real estate as collateral. This
includes: Construction lending, farm
mortgage lending, Federal Land Banks,
home equity credit lending, loan
correspondents (i.e., lending funds with
real estate as collateral), mortgage
banking (i.e., nondepository mortgage
lending), and mortgage companies.

2 Michael G. Jacobides, ‘‘Mortgage Banking
Unbundling: Structure, Automation, and Profit,’’
Mortgage Banking, January 2001, pages 28–40.

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originate loans mainly for wholesale
lenders.
Studies of the mortgage brokerage
industry do not find there to be high
fixed costs for firms. There is little
evidence of economies of scale in
mortgage origination but there is some
evidence that brokers are more efficient
originators than mid-size and large
lenders. Olson (2002) reports that his
surveys find no economies of scale in
mortgage production—a one-person firm
produced as many loans per employee
as a larger firm. Olson regards brokers
as low-cost, highly-competitive firms,
vigorously competing with one another
and with little opportunity to earn
above-normal profits.3
B. Current State of the Market
In 2014, 7,062 institutions reported
data on nearly 10 million home
mortgage applications, resulted in 6
million originations. This is down from
8.7 million originations in 2013. There
was an historically high share of loans
originated outside the federally insured
banking system by institutions such as
independent mortgage companies and
credit unions, not subject to Community
Reinvestment Act (Federal Reserve,
2015).4
The share of mortgages originated by
non-depository, independent mortgage
companies has increased sharply in
recent years. Small banks and credit
unions have also increased market
shares over the past decade. The
fraction of originations attributable to
large banks and their nonbank
subsidiaries diminished. Banks and
thrifts accounted for 45 percent of all

reported mortgage originations;
independent mortgage companies 40
percent, credit unions over 9 percent,
affiliates, remainder (Federal Reserve,
2015).
In 2014, 7,062 reporting institutions,
4,118 banks and thrifts, 3,367 were
small (assets less than $1 billion), 1,984
credit unions, 139 mortgage companies
affiliated with depositories (banks and
credit unions), 821 independent
mortgage companies. In 2014, small
banks and credit unions were much
more likely to originate conventional
higher-priced loans than large banks
and mortgage companies. Small banks
and credit unions originated about 18
percent of conventional home-purchase
loans, but accounted for 59 percent of
higher-priced conventional homepurchase loans (Federal Reserve, 2015).
C. Size Standards
SBA’s size standards (2016) define
whether a business entity is small and,
thus, eligible for Government programs
and preferences reserved for ‘‘small
business’’ concerns. Size standards have
been established for types of economic
activity, or industry, generally under the
North American Industry Classification
System (NAICS). For most industries
considered, a ‘‘small’’ business is
defined by revenue. Size standards are
based on another criterion if revenue is
not suitable, either because prices are
volatile or there are more appropriate
measures.
According to the U.S. Census Bureau,
revenue for Finance, Insurance and Real
Estate includes commissions and fees
from all sources, rents, net investment

66571

income, interest, dividends, royalties,
and net insurance premiums earned.
SBA considers a real estate credit small
if its annual revenue is no greater than
$38.5 million. A mortgage broker is
defined as small if its revenue is no
greater than $7.5 million.
For three of the industries considered
in this analysis (Commercial Banks,
Savings Institutions, and Credit
Unions), the SBA definition of small is
by the dollar amount of assets ($550
million). Assets include: Cash, interestearning loans, leases, securities, real
estate, letters of credit, loans to other
banks, any other financial assets, and
intangible assets.
The diversity of size standards makes
it difficult to perform a precise analysis
of the ubiquity small firms. This
difficulty is compounded when sources
of business statistics do not report their
data by SBA’s size standards and that
industry definition may not be
equivalent. When an exact
correspondence is not possible, HUD
will, by necessity, use an alternative
size standard. For example, asset data is
collected by the Federal Deposit
Insurance Corporation (FDIC) for
Commercial Banks and Savings
Institutions. FDIC uses $1 billion as a
means to categorize banks and thrifts,
which is more inclusive than SBA’s
definition.
D. Prevalence of Small Firms
Estimating the prevalence of small
firms in making FHA-insured
condominium loans requires combining
statistics from different sources.

FHA INSURED CONDOMINIUM LOANS BY LENDER TYPE *
Firms
(% of number)

Forward condo
loans
(% of number
of loans)

Bank (Total) .....................................................................................................
Small Bank ** ............................................................................................
Large Bank ...............................................................................................
Mortgage Company .........................................................................................
Affiliated ....................................................................................................
Independent ..............................................................................................
Credit Union .....................................................................................................

30
13
17
66
1
65
3

20
3
17
79
0
79
1

19
3
16
79
0
79
1

7
1
6
93
0
93
0

Total **** ............................................................................................

100

100

100

100

sradovich on DSK3GMQ082PROD with PROPOSALS

Type of lender

All condo
loans ***
(% of number
of loans)

All condo
loans
(% of dollar
volume)

* Source: Single Family Data Warehouse 6/1/14–5/31/16.
** Defined as having assets no greater than $1 Billion.
*** All = forward + HECM.
**** Percentages by lender type are rounded and so may not sum to 100.

The table provides us with some
insight concerning the types of firms

that are involved in making FHA-condo
loans. The predominant originators by

any measure are mortgage companies.
Independent mortgage companies make

3 Olson, David. 2002. ‘‘Report of David Olson.’’
Report submitted to U.S. District Court, Court of
Minnesota in Civil Case No. 97–2068 DWF/SRN:

Lonnie and Danny Glover (Plantiffs) vs. Standard
Federal Bank, ABN AMRO Mortgage Group, Inc.
and Heartland Mortgage Corporation (Defendants).

4 http://www.federalreserve.gov/pubs/bulletin/
2015/pdf/2014_HMDA.pdf.

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79 percent of the loans and 93 percent
of the dollar volume. The largest
independent mortgage company,
Quicken Loans, accounts for over 5.5
percent of all condo loans. In this table,
‘‘banks’’ are equivalent to commercial
banks and savings institutions. Small
banks (assets of no greater than $1
billion) represent a small proportion of
firms (13 percent) and an even smaller
percentage of condo loans (3 percent).
Given the dominance of mortgage
companies, an estimate of the small
companies originating mortgage loans is
essential to a good economic analysis.
HUD has data concerning the total FHAinsured loans made by the firms also
involved in the condo business. An
estimate of the total loans can be arrived

at by dividing FHA loans by FHA’s
market share. Doing so will lead to
estimates that are inaccurately high for
some and too low for others. On average
the estimate will be correct. In the last
three years (2013–2015), FHA’s share of
the dollar value of home purchases as
varied around 15 percent.
The estimated value of loans can be
converted to an estimated revenue by
multiplying by an appropriate
percentage. Estimates of broker income
vary between 1 and 3 percent. We use
the lower to arrive for a more expansive
count of small business. Of all condo
lenders, 31 percent of the firms are
small mortgage companies (earning less
than $7.5 million). These small
mortgage companies make 5 percent of

all condo loans and 2 percent of the
dollar volume.
We counted a total of only 39 credit
unions over a two-year period. Credit
Unions are not active in making condo
loans. The proportion of loans and
dollar value made by credit unions is
very close to 0 percent. Thus, accuracy
in estimating the small/large percentage
is not as important as for other types of
lenders. We will assume that all credit
unions are small because the average
asset amount is significantly below $1
billion (Monthly Credit Union
Estimates, May 2016).
Small firms constitute 47 percent of
originators of FHA-insured condo loans,
9 percent of all condo loans, and 3
percent of the dollar volume.

ESTIMATES OF PREVALENCE OF SMALL LOAN ORIGINATORS INVOLVED IN FHA CONDO LENDING
Small firms
(%)

Dollar volume
of condo loans
(%)

Banks ...........................................................................................................................................
Mortgage Companies ..................................................................................................................
Credit Unions ...............................................................................................................................

13
31
3

3
5
1

1
2
0

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

47

9

3

E. Economic Impact

sradovich on DSK3GMQ082PROD with PROPOSALS

Number of
condo loans
(%)

Approximately half of the firms
engaged in making FHA-insured
condominium loans are estimated to be
small. This share of small firms could
change depending upon the regulatory
impact of the rule and whether that
impact is disproportionate. Although
small business constitutes 47 percent of
all firms, they originate only 9 percent
of all loans, making it more difficult to
pass on any costs of origination to
borrowers. Reducing (raising) fixed
costs benefits (harms) small firms
disproportionately more than large ones.
One aspect of the rule that could have
a negative and disproportionate impact
on small firms are any requirements to
participate in the DELRAP program.
While many of the requirements will be
met with little difficulty by alreadyapproved lenders, requirements that are
related to the level of business activity
would place a relatively higher burden
on small firms. To be qualified for
Direct Endorsement authority, a
mortgagee must satisfy the following
characteristics: Possess at least one of
year experience in condo loans; have
made at least 10 FHA approved condo
loans; possess a quality control plan;
and participating staff is limited to those
with prior experience. All of these
requirements would be easier to meet by
larger firms with greater capacity.
Nonetheless, small firms that have at

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least occasional experience should be
able to satisfy the requirements without
undue burden.
Other elements of the rule lift
regulatory burdens. First, allowing
Single-Unit Approval enables small
lenders business opportunities without
the cost of seeking approval for an entire
condominium project.5 Second, by
providing that only completed projects
may be approved, this rule eliminates
the need for HUD to require an
environmental review from lenders as a
condition of approval. This change will
benefit small firms that are less likely to
retain specialists. Although some
components of the rule raise the cost of
compliance for small firms, other
elements will expand their
opportunities and allow them to spread
the compliance costs over a greater
number of loans. Also, participation in
condominium insurance, like HUD’s
other mortgage insurance programs, is
purely voluntary.
Therefore, the undersigned certifies
that this rule will not have a significant
impact on a substantial number of small
entities.
Notwithstanding HUD’s view that this
rule will not have a significant effect on
5 As

noted in the accompanying Regulatory
Impact Analysis, the average cost of a project
DELRAP approval would be $1,250. Extending the
approval period to 3 years reduces this cost by
approximately one-third for all lenders.

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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.
Executive Order 13132, Federalism
Executive Order 13132 (entitled
‘‘Federalism’’) prohibits, to the extent
practicable and permitted by law, an
agency from promulgating a regulation
that has federalism implications and
either imposes substantial direct
compliance costs on state and local
governments and is not required by
statute or preempts state law, unless the
relevant requirements of section 6 of the
Executive Order are met. This rule does
not have federalism implications and
does not impose substantial direct
compliance costs on state and local
governments or preempt state law
within the meaning of the Executive
Order.
Catalog of Federal Domestic Assistance
Number
The Catalog of Federal Domestic
Assistance number for 24 CFR parts 203
and 234 is 14.117.
List of Subjects
24 CFR Part 203
Hawaiian Natives, Home
improvement, Indians-lands, Loan

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programs-housing and community
development, Mortgage insurance,
Reporting and recordkeeping
requirements, Solar energy.
24 CFR Part 234
Condominiums, Mortgage insurance,
Reporting and recordkeeping
requirements.
For the reasons stated in the foregoing
preamble, HUD proposes to amend 24
CFR parts 203 and 234 as follows:
PART 203—SINGLE FAMILY
MORTGAGE INSURANCE
1. The authority citation for part 203
is revised to read as follows:

■

Authority: 12 U.S.C. 1707, 1709, 1710,
1715b, 1715z–16, 1715u, and 1715z–21; 15
U.S.C. 1639c; 42 U.S.C. 3535(d).

Subpart A—Eligibility Requirements
and Underwriting Procedures
■

2. Add § 203.8 to read as follows:

sradovich on DSK3GMQ082PROD with PROPOSALS

§ 203.8 Approval of mortgagees for Direct
Endorsement Lender Review and Approval
Process (DELRAP).

(a) General. Each mortgagee that
chooses to participate in the review and
approval of Condominium Projects, as
set forth in § 203.43b, must be granted
authority to participate in the Direct
Endorsement Lender Review and
Approval Process (DELRAP).
(b) DELRAP Authority—(1) Eligibility.
To be granted DELRAP authority, as
described in § 203.43b, a mortgagee
must be unconditionally approved for
the Direct Endorsement program as
provided in § 203.3 and meet the
following requirements:
(i) Have staff with at least one year of
experience in underwriting mortgages
on condominiums and/or condominium
project approval;
(ii) Have originated not less than 10
condominium loans in projects
approved by the Commissioner;
(iii) Have an acceptable quality
control plan that includes specific
provisions related to DELRAP; and
(iv) Ensure that only staff members
meeting the above experience
requirements participate in the approval
of a Condominium Project using
DELRAP authority.
(2) Conditional DELRAP Authority.
Mortgagees will be granted Conditional
DELRAP authority upon provision of
notice to the Commissioner of the intent
to use DELRAP. Mortgagees with
Conditional DELRAP authority must
submit all recommended Condominium
Project approvals, denials and
recertifications to FHA for review. If
FHA agrees with the mortgagee’s
recommendation, it will advise the

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mortgagee that it may proceed with the
recommended decision on the
Condominium Project.
(3) Unconditional DELRAP Authority.
Mortgagees will be granted
unconditional DELRAP authority after
completing at least five (5) DELRAP
reviews to the satisfaction of the
Commissioner and may then exercise
DELRAP authority to approve projects
in accordance with requirements of the
Commissioner.
(c) Reviews. HUD will monitor a
mortgagee’s performance in DELRAP on
an ongoing basis.
(1) If the review shows that there are
no material deficiencies, subsequent
project approvals, denials or
recertifications may be selected for postaction review based on a percentage as
determined by the Commissioner.
(2) If the review shows that there are
deficiencies in the mortgagee’s DELRAP
performance, the mortgagee may be
returned to Conditional DELRAP status.
(3) If additional reviews continue to
show deficiencies in the mortgagee’s
DELRAP performance, the mortgagee’s
authority to participate in DELRAP may
be terminated or other action taken
against the mortgagee or responsible
staff reviewer.
(d) Termination of DELRAP Authority.
(1) HUD may immediately terminate the
mortgagee’s authority to participate in
DELRAP or take any action listed in 24
CFR 203.3(d) if the mortgagee:
(i) Violates any of the requirements
and procedures established by the
Secretary for mortgagees approved to
participate in DELRAP, the Direct
Endorsement program, or the Title II
Single Family mortgage insurance
program; or
(ii) If HUD determines that other good
cause exists.
(2) Such termination will be effective
upon receipt of HUD’s notice advising
of the termination.
(3) Notwithstanding any provisions of
this section, the Commissioner reserves
the right to take administrative action,
including revocation of DELRAP
authority, against any mortgagee and
staff reviewer because of unacceptable
performance. Any termination instituted
under this section is distinct from
withdrawal of mortgagee approval by
the Mortgagee Review Board under 24
CFR part 25.
(e) Reinstatement. A mortgagee whose
DELRAP authority is terminated under
this section may request reinstatement if
the mortgagee’s DELRAP authority has
been terminated for at least 6 months. In
addition to addressing the eligibility
criteria specified in paragraph (b)(1) of
this section, the application for
reinstatement must be accompanied by

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a corrective action plan addressing the
issues that led to the termination of the
mortgagee’s DELRAP authority, along
with evidence that the mortgagee has
implemented the corrective action plan.
The Commissioner may grant
Conditional DELRAP authority if the
mortgagee’s application is complete and
the Commissioner determines that the
underlying causes for the termination
have been satisfactorily remedied. The
mortgagee will be required to complete
successfully at least five (5) test cases in
accordance with paragraph (b)(2) in
order to receive unconditional DELRAP
authority as provided in paragraph
(b)(3) above.
■ 3. Revise § 203.17(a)(1) to read as
follows:
§ 203.17

Mortgage provisions.

(a) Mortgage form. (1) The term
‘‘mortgage’’ as used in this part, except
§ 203.43c, shall have the meaning given
in Section 201 of the National Housing
Act, as amended (12 U.S.C. 1707).
*
*
*
*
*
■ 4. Add 203.43b to read as follows:
§ 203.43b Eligibility of mortgages on
single-family condominium units.

(a) Definitions. As used in this part:
(1) Condominium Association
(Association) means the organization,
regardless of its formal legal name that
consists of homeowners within a
condominium project for the purpose of
managing the financial and commonarea assets.
(2) Condominium Project shall mean
the project in which one-family
dwelling units are attached, semidetached, or detached, or are
manufactured housing units, and in
which owners hold an undivided
interest in the common areas and
facilities that serve the project.
(3) Condominium Unit shall mean
real estate consisting of a one-family
unit in a multifamily project, including
a project in which the dwelling units are
attached, or are manufactured housing
units, semi-detached, or detached, and
an undivided interest in the common
areas and facilities that serve the
project.
(4) Infrastructure means the
condominium project’s streets, storm
water management, water and sewage
systems, and utilities, along with the
project’s common elements and
amenities, such as parking lots,
community buildings, swimming pools,
golf courses, playgrounds, and any
similar items, called for in the project or
legal phase.
(5) Rental for Transient or Hotel
Purposes shall have the meaning given

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in section 513(e) of the National
Housing Act (12 U.S.C. 1731b(e)).
(6) Single-Unit Approval means
approval of one unit in an unapproved
condominium project under paragraph
(h) of this section.
(7) Site Condominium means a single
family detached dwelling (which does
not have a shared garage or any other
attached building, including such
improvements as archways, or
breezeways), which is encumbered by a
declaration of condominium covenants
or condominium form of ownership,
and which consists of the entire
structure as well as the site and air
space and is not considered to be a
common area or limited common area.
(b) Eligibility. A mortgage secured by
a Condominium Unit shall be eligible
for insurance under section 203 of the
National Housing Act if it meets the
requirements of this subpart, except as
modified by this section.
(c) Approval required. To be eligible
for insurance under this section, a
Condominium Unit must be located in
a Condominium Project approved by
HUD or a DELRAP mortgagee approved
under § 203.8, or meet the additional
requirements for approval as a Site
Condominium or Single-Unit Approval.
(d) Condominium Project Approval:
Eligibility Requirements. To be eligible
for Condominium Project approval, the
Condominium Project must:
(1) Be primarily residential in nature
and not be intended for rental for
Transient or Hotel Purposes;
(2) Consist of units that are solely onefamily units;
(3) Be in full compliance with all
applicable Federal, State, and local laws
with respect to zoning, Fair Housing,
and accessibility for persons with
disabilities, including but not limited to
the Fair Housing Act, 42 U.S.C. 3601 et
seq., Section 504 of the Rehabilitation
Act, 29 U.S.C. 794, and the Americans
with Disabilities Act, 42 U.S.C. 12101 et
seq., where relevant;
(4) Be complete and ready for
occupancy, including completion of all
the infrastructure of the project or legal
phase, and not subject to further
rehabilitation, construction, phasing, or
annexation, except to the extent that
approval is sought for legal phasing in
compliance with the requirements of
paragraph (d)(6)(x) of this section;
(5) Be reviewed and approved by the
local jurisdiction with respect to the
condominium plat or similar
development plan and any phases; if
applicable, the approved plat or
development plan must have been
recorded in the land records of the
jurisdiction; and

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(6) Meet such further approval
requirements as provided by the
Commissioner through notices with
respect to:
(i) Nature of title to realty or leasehold
interests;
(ii) Control over, and organization of,
the Condominium Association;
(iii) Minimum insurance coverage for
the Condominium Project;
(iv) Planned or actual special
assessments;
(v) Financial condition of the
Condominium Project;
(vi) Existence of any pending legal
action, or physical property condition;
(vii) Commercial/non-residential
space, which must be within a range
between 25 and 60 percent of the total
floor area (which range may be changed
following the procedures in paragraph
(d)(6) of this section), with the specific
maximum and minimum percentages
within that range to be established by
HUD through notice, provided that such
commercial/non-residential space does
not negatively impact the residential use
of the project or create adverse
conditions to the occupants of
individual condominium units.
(viii) Acceptable maximum
percentages of units with FHA-insured
mortgages, which must be within a
range between 25 and 75 percent of the
total number of units in the project
(which range may be changed following
the procedures in paragraph (d)(6) of
this section), with the specific
maximum percentage of units with
FHA-insured mortgages within that
range to be established by HUD through
notice.
(ix) Acceptable minimum levels of
owner occupancy, including units
under a bona fide contract to purchase
by a purchaser who occupies or will
occupy the unit as their principal
residence as well as a purchaser who
occupies or intends to occupy the unit
as a secondary residence, as defined in
§ 203.18(f)(2), within a range between 25
and 75 percent of the total number of
units in the project (which may be
changed following the procedures in
paragraph (d)(6) of this section), with a
specific minimum percentage to be
established by HUD through notice.
(x) Phasing, provided that only legal
phasing is permitted and individual
phases must contain sufficient numbers
of units to be separately sustainable as
required by HUD, so that the insurance
fund is not put at undue risk. In
determining whether to accept legal
phasing, HUD will assess the potential
risk to the insurance fund and other
factors that HUD may publish in
notices. Phases must meet HUD’s
requirements for approval in paragraph

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(d) of this section and must at a
minimum be:
(A) In a vertical building, contiguous,
with all units built out and having a
certificate of occupancy; or
(B) In a detached or semi-detached
development, consisting of groups of
adjoining or contiguous homes (which
may include, at HUD’s discretion,
easements for utilities and roads serving
the homes), where all homes in a phase
are built out and have a certificate of
occupancy;
(xi) Reserve requirements, provided
the reserve account is funded with at
least 10 percent of the monthly unit
assessments, unless a lower amount is
deemed acceptable by HUD based on a
reserve study completed not more than
24 months before a request for a lower
amount is received.
(xii) Such other matters that may
affect the viability or marketability of
the project or its units.
(e) The Secretary will publish any
generally applicable change in the
upper and lower limits of the ranges of
percentages in paragraphs (d)(6)(vii)
through (ix) of this section in a notice
published for 30 days of public
comment. After considering the
comments, the Department will publish
a final notice announcing the new
overall upper and lower limits of the
range of percentages being
implemented, and the date on which the
new standard becomes effective.
(f) The Secretary may grant an
exception to any specifically prescribed
requirements within paragraph (d)(6) of
this section on a case-by-case basis in
HUD’s discretion, provided that:
(1) In the case of an exception to the
approval requirements for the
commercial/nonresidential space
percentage that HUD establishes under
paragraph (d)(6)(vii) of this section, any
request for such an exception and the
determination of the disposition of such
request may be made, at the option of
the requester, under the direct
endorsement lender review and
approval process or under the HUD
review and approval process through
the applicable field office of the
Department; and
(2) In determining whether to allow
such an exception, factors relating to the
economy for the locality in which the
project is located or specific to the
project, including the total number of
family units in the project, shall be
considered. A DELRAP lender, in
determining whether to grant a
requested exception, shall follow any
procedures that HUD may establish.
(g) Application for Condominium
Project approval and Renewal of
Approval. (1) In order to become

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approved, an application for
Condominium Project approval, in
accordance with the requirements of the
Commissioner, must be submitted to
either HUD or a DELRAP mortgagee, if
consistent with the mortgagee’s
DELRAP approval.
(2) The application will be reviewed
and if all eligibility criteria have been
met, the Condominium Project will be
approved and placed on the list of HUDapproved Condominium Projects.
(3) Unless otherwise specified in
writing by HUD, Condominium Projects
are approved for a period of three (3)
years from the date of placement on the
list of approved condominiums. HUD
may rescind a Condominium Project’s
approval at any time if the project fails
to comply with any requirement for
approval.
(4) Eligible parties may request
renewal of the approval of an approved
Condominium Project by submitting a
request for recertification no earlier than
6 months prior to expiration of the
approval or no later than 6 months after
expiration of the approval. HUD shall
specify the format for the recertification
request, which shall allow the request to
be supported by updating previously
submitted information, rather than
resubmission of all information.
However, if the request for
recertification is not submitted within 6
months after the expiration of the
Condominium Project’s approval, a
complete, new approval application is
required.
(h) Single-Unit Approval. (1) Limit on
Single-Unit Approvals. HUD will not
insure mortgages in an unapproved
project if the percentage of such
mortgages exceeds an amount
determined by the Commissioner to be
necessary for the protection of the
insurance fund, which percentage will
be specified by the Commissioner by
notice.
(2) Single-Unit Approvals. Mortgagees
must ensure that the Condominium Unit
is located in a Condominium Project
that either meets the eligibility
requirements for approval as set forth in
paragraph (d) of this section as modified
by this paragraph, except that HUD may
provide that Single-Unit Approvals may
be approved by meeting a subset of
these standards, or less stringent
standards, as stated by notice. In
addition, a unit may be eligible for
Single-Unit Approval if it:
(i) Is not in a Condominium Project
that is on the list of FHA-approved
Condominium Projects, or in a project
that has been subject to adverse
determination for significant issues that
affect the viability of the project;

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(ii) Is in a project that is complete
under paragraph (d)(4) of this section;
(iii) Is not a manufactured housing
condominium project or 2–4 unit
project;
(iv) Is not a manufactured home and
is in a project that has at least 5
dwelling units; and
(v) Is in a project in which the amount
of Single-Unit Approvals is limited to a
percentage of the total number of units
in the project that is within a range of
0 to 20 percent, with the exact
percentage within that range to be
determined by HUD through notice.
(3) HUD will publish any generally
applicable change in the overall upper
and lower limits of the range stated in
paragraph (h)(2)(v) of this section by
notice published for 30 days of public
comment. After considering the
comments, HUD will publish a final
notice announcing the new upper and
lower limit of the range of percentages
being implemented, and the date on
which the new standard becomes
effective.
(i) Site Condominium. Site
condominiums are as defined in
§ 203.43b. Site Condominiums must
meet all of the requirements of
paragraph (d)(1) of this section for
approval, except that:
(1) Insurance and maintenance costs
must be the sole responsibility of the
unit owner; and
(2) Any common assessments
collected must be restricted to use solely
for amenities outside of the footprint of
the individual site.
■ 5. Amend § 203.50 to revise
paragraphs (a)(1) and (f) to read as
follows:

exteriors or areas that are the
responsibility of the Association; and
*
*
*
*
*
(f) The loan may not exceed an
amount which, when added to any
outstanding indebtedness of the
borrower that is secured by the
property, creates an outstanding
indebtedness in excess of the lesser of:
(1)(i) The limits prescribed in
§ 203.18(a)(1) and (3) (in the case of a
dwelling to be occupied as a principal
residence, as defined in § 203.18(f)(1));
(ii) The limits prescribed in
§ 203.18(a)(1) and (4) (in the case of a
dwelling to be occupied as a secondary
residence, as defined in § 203.18(f)(2));
(iii) Eighty-five (85) percent of the
limits prescribed in § 203.18(c), or such
higher limit, not to exceed the limits set
forth in § 203.18(a)(1) and (3), as the
Secretary may prescribe (in the case of
an eligible non-occupant mortgagor as
defined in § 203.18(f)(3));
(iv) The limits prescribed in
§ 203.18a, based upon the sum of the
estimated cost of rehabilitation and the
Commissioner’s estimate of the value of
the property before rehabilitation;
(2) The limits prescribed in the
authorities listed in this paragraph (f),
based upon 110 percent of the
Commissioner’s estimate of the value of
the property after rehabilitation; or
(3) For any Condominium Unit that is
not a detached dwelling, attached
townhouse dwelling, manufactured
home (as defined in 24 CFR 3280.2), or
site condominium (as defined in
§ 203.43b), 100 percent of the afterimprovement value of the
Condominium Unit.
*
*
*
*
*

§ 203.50

PART 234—CONDOMINIUM
OWNERSHIP MORTGAGE INSURANCE

Eligibility of rehabilitation loans.

*

*
*
*
*
(a) * * *
(1) The term rehabilitation loan
means a loan, advance of credit, or
purchase of an obligation representing a
loan or advancement of credit, made for
the purpose of financing:
(i) The rehabilitation of an existing
one-to-four unit structure which will be
used primarily for residential purposes;
(ii) The rehabilitation of such a
structure and refinancing of the
outstanding indebtedness on such
structure and the real property on which
the structure is located;
(iii) The rehabilitation of such a
structure and the purchase of the
structure and the real property on which
it is located; or
(iv) The rehabilitation of the interior
space or the installation of firewalls in
the attic of a condominium unit, as
defined in § 203.43b, excluding any

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6. The authority citation for part 234
continues to read as follows:

■

Authority: 12 U.S.C. 1715b and 1715y; 42
U.S.C. 3535(d).

Subpart A—Eligibility Requirements—
Individually Owned Units
■

7. Add § 234.2 to read as follows:

§ 234.2

Savings clause.

Effective [date that is 30 days after the
date of publication of the final rule],
HUD’s regulations at § 203.43b of this
chapter govern approval of real estate
consisting of a one-family unit in a
multifamily project, and an undivided
interest in the common areas and
facilities which serve the project, except
where the project has a blanket
mortgage insured under section 234(d)
of the National Housing Act, 12 U.S.C.

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1715y(d) (section 234(d)). Where the
project has a blanket mortgage insured
by HUD under section 234(d), this 24
CFR part 234 applies to the approval of
a one-family unit in such project.
Dated: September 21, 2016.
Edward L. Golding,
Principal Deputy Assistant Secretary for
Housing.
[FR Doc. 2016–23258 Filed 9–27–16; 8:45 am]
BILLING CODE 4210–67–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–123600–16]
RIN 1545–BN55

Guidance under Section 851 Relating
to Investments in Stock and Securities
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:

This document provides
guidance relating to the income test and
the asset diversification requirements
that are used to determine whether a
corporation may qualify as a regulated
investment company (RIC) for federal
income tax purposes. These proposed
regulations provide guidance to
corporations that intend to qualify as
RICs.

SUMMARY:

Written or electronic comments
and requests for a public hearing must
be received by December 27, 2016.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–123600–16), Room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to: CC:PA:LPD:PR (REG–123600–
16), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC 20224, or sent
electronically via the Federal
eRulemaking Portal at
www.regulations.gov (IRS REG–123600–
16).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Matthew Howard of the Office of
Associate Chief Counsel (Financial
Institutions and Products) at (202) 317–
7053; concerning submissions of
comments and requests for a public
hearing, Regina Johnson (202) 317–6901
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:

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Background and Explanation of
Provisions
This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) relating to RICs. Section 851 of
the Internal Revenue Code (Code) sets
forth requirements for qualifying as a
RIC.
Section 851(a) provides that a RIC is
any domestic corporation that (1) at all
times during the taxable year is
registered under the Investment
Company Act of 1940, Public Law 76–
768, 54 Stat. 789 (codified as amended
at 15 U.S.C. 80a–1—80a–64 (2016)) (the
1940 Act), as a management company or
unit investment trust or has in effect an
election under the 1940 Act to be
treated as a business development
company; or (2) is a common trust fund
or other similar fund excluded by
section 3(c)(3) of the 1940 Act from the
definition of ‘‘investment company’’
and is not included in the definition of
‘‘common trust fund’’ by section 584(a).
To be treated as a RIC for a taxable
year, a corporation must satisfy the
income test set forth in section 851(b).
The income test under section 851(b)(2)
requires that at least 90 percent of the
corporation’s gross income for the
taxable year be derived from:
(A) dividends, interest, payments with
respect to securities loans (as defined in
section 512(a)(5)), and gains from the sale or
other disposition of stock or securities (as
defined in section 2(a)(36) of the [1940 Act])
or foreign currencies, or other income
(including but not limited to gains from
options, futures or forward contracts) derived
with respect to its business of investing in
such stock, securities, or currencies, and (B)
net income derived from an interest in a
qualified publicly traded partnership (as
defined in [section 851(h)]).

Section 851(b)(3) provides that to be
treated as a RIC a corporation also must
satisfy the following asset
diversification requirements at the close
of each quarter of the corporation’s
taxable year:
(A) at least 50 percent of the value of its
total assets is represented by—
(i) cash and cash items (including
receivables), Government securities and
securities of other [RICs], and
(ii) other securities for purposes of this
calculation limited, except and to the extent
provided in [section 851(e)], in respect of any
one issuer to an amount not greater in value
than 5 percent of the value of the total assets
of the taxpayer and to not more than 10
percent of the outstanding voting securities
of such issuer, and
(B) not more than 25 percent of the value
of its total assets is invested in—
(i) the securities (other than Government
securities or the securities of other [RICs]) of
any one issuer,
(ii) the securities (other than the securities
of other [RICs]) of two or more issuers which

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the taxpayer controls and which are
determined, under regulations prescribed by
the Secretary, to be engaged in the same or
similar trades or businesses or related trades
or businesses, or
(iii) the securities of one or more qualified
publicly traded partnerships (as defined in
[section 851(h)]).

These proposed regulations relate to
the RIC income test and asset
diversification requirements. Section A.
of this preamble concerns the meaning
of security. Section B. of this preamble
addresses inclusions under sections
951(a)(1)(A)(i) and 1293(a). These
proposed regulations also revise
§ 1.851–2(b)(1) of the existing final
regulations to merely incorporate
changes to section 851(b)(2) since the
existing final regulations were
published in the Federal Register on
November 26, 1960, in TD 6500 (25 FR
11910).
A. Defining Securities
The income test and asset
diversification requirements both use
the term ‘‘securities.’’ For purposes of
the income test, a security is defined by
reference to section 2(a)(36) of the 1940
Act, while section 851(c) provides rules
and definitions that apply for purposes
of the asset diversification requirements
of section 851(b)(3) but does not
specifically define ‘‘security.’’ Section
851(c)(6), however, provides that the
terms used in section 851(b)(3) and (c)
have the same meaning as when used in
the 1940 Act. An asset is therefore a
security for purposes of the income test
and the asset diversification
requirements if it is a security under the
1940 Act.
The Treasury Department and the IRS
have in the past addressed whether
certain instruments or positions are
securities for purposes of section 851. In
particular, Rev. Rul. 2006–1 (2006–1 CB
261) concludes that a derivative contract
with respect to a commodity index is
not a security for purposes of section
851(b)(2). The ruling also holds that
income from such a contract is not
qualifying other income for purposes of
section 851(b)(2) because that income is
not derived with respect to the RIC’s
business of investing in stocks,
securities, or currencies. Rev. Rul.
2006–1 was modified and clarified by
Rev. Rul. 2006–31 (2006–1 CB 1133),
which states that Rev. Rul. 2006–1 was
not intended to preclude a conclusion
that income from certain instruments
(such as certain structured notes) that
create commodity exposure for the
holder is qualifying income under
section 851(b)(2).
After the issuance of Rev. Rul. 2006–
31, the IRS received a number of private

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