FHA Multifamily Programs Closing Guide Revision Limits HUD Field Office Discretion On HUD Loan Transactions
9.23.13
News & Publications
CCN Client Alert
The U.S. Department of Housing & Urban Development (“HUD”) recently revised its FHA Multifamily Programs Closing Guide (the “Closing Guide”) to provide for a more centralized and regulated process for approving deal-specific changes to the HUD loan documents. These revisions to the Closing Guide may lead to longer processing times and less responsiveness to deal-specific business terms on HUD transactions. These revisions will also limit HUD’s Multifamily Hub Directors’ (“Hub Directors”) ability to exercise discretion in approving deviations from standard HUD requirements. However, there is the potential that these revisions will produce more uniformity within HUD loan programs across jurisdictions, consistent with HUD’s plans to consolidate all multifamily operations, nationwide, into ten local offices. The revised Closing Guide is available on HUD’s website at http://portal.hud.gov/hudportal/HUD?src=/program_offices/general_counsel/mffaqs.
The Closing Guide provides procedures and protocols for the preparation and review of loan documents used in connection with FHA multifamily insured loan programs. The Closing Guide is applicable to all multifamily rental projects with a HUD Firm Commitment issued on or after September 1, 2011, except those under Sections 232 and 242 of the National Housing Act.
Notable revisions to HUD’s multifamily closing requirements include:
The Closing Guide provides procedures and protocols for the preparation and review of loan documents used in connection with FHA multifamily insured loan programs. The Closing Guide is applicable to all multifamily rental projects with a HUD Firm Commitment issued on or after September 1, 2011, except those under Sections 232 and 242 of the National Housing Act.
Notable revisions to HUD’s multifamily closing requirements include:
• Limited Local Waiver Authority. HUD Field Offices no longer have general authority to grant waivers of Closing Guide requirements, or to permit changes to the FHA Multifamily Closing Documents or the sample forms provided in the Closing Guide, unless expressly provided in the form documents or unless there is a compelling deal-specific rationale for such a change or waiver. In all cases, changes and waivers must now be reviewed and approved by HUD Headquarters.
• Modification Request Procedures. The Closing Guide now outlines the specific procedures that must be followed in order to request changes to the FHA Multifamily Closing Documents, changes to sample forms, or waivers of Closing Guide requirements. Previously, there were no specific procedures for making change requests and Hub Directors generally could permit changes to the loan documents without obtaining the approval of HUD Headquarters, so long as the requested change did not violate the federal regulations applicable to HUD’s multifamily programs.
• Mandatory Use of HUD Secondary Finance Rider. Use of the HUD Secondary Finance Rider (Closing Guide part 5.1), which governs what a permitted private subordinate mortgage lender can and cannot do, is now mandatory in those limited circumstances where HUD permits secondary mortgage financing. While the HUD Secondary Financing Rider was included in the previous version of the Closing Guide as a sample document, HUD did not specify under what circumstances, if any, it had to be used.
• Negotiated Subordination Agreements. Hub Directors are now permitted to negotiate the Subordination Agreement (HUD-92420M) with public agencies (such as the California Tax Credit Allocation Committee, the California Debt Limit Allocation Committee, or the Los Angeles Housing Department) to facilitate compliance with requirements of the governmental program providing tax credits, bonds, or other financing. This is a deviation from HUD’s previous “one-size-fits-all” approach for use of the Subordination Agreement. However, negotiated Subordination Agreements remain subject to review and approval by the Assistant General Counsel of the Multifamily Mortgage Division and HUD Headquarters Office of Multifamily Housing. Additionally, once a final form of negotiated Subordination Agreement has been agreed upon and approved, it shall become a uniform HUD template to be used in all subsequent transactions involving that particular state/local government program. Thus, Subordination Agreement forms negotiated between HUD and the various state and local government agencies will likely be put into final template form without input from all potentially affected parties.
• Limited Authority to Negotiate Subordinate Business Terms. Hub Directors have been given authority to permit limited changes to the business terms of the Subordination Agreement and HUD Rider/Amendment to Restrictive Covenants (Closing Guide part 5.3) as are necessary due to the unique characteristics of a given transaction. However, changes to legal terms of the documents remains prohibited without the approval of the Assistant General Counsel for the Multifamily Mortgage Division. It is unclear where HUD draws the distinction between “business terms” and “legal terms.” However, the Closing Guide now implies that survival of affordability restrictions upon foreclosure is a “business term” because it expressly authorizes Hub Directors to permit survival of such restrictions under certain circumstances.
• Modification Request Procedures. The Closing Guide now outlines the specific procedures that must be followed in order to request changes to the FHA Multifamily Closing Documents, changes to sample forms, or waivers of Closing Guide requirements. Previously, there were no specific procedures for making change requests and Hub Directors generally could permit changes to the loan documents without obtaining the approval of HUD Headquarters, so long as the requested change did not violate the federal regulations applicable to HUD’s multifamily programs.
• Mandatory Use of HUD Secondary Finance Rider. Use of the HUD Secondary Finance Rider (Closing Guide part 5.1), which governs what a permitted private subordinate mortgage lender can and cannot do, is now mandatory in those limited circumstances where HUD permits secondary mortgage financing. While the HUD Secondary Financing Rider was included in the previous version of the Closing Guide as a sample document, HUD did not specify under what circumstances, if any, it had to be used.
• Negotiated Subordination Agreements. Hub Directors are now permitted to negotiate the Subordination Agreement (HUD-92420M) with public agencies (such as the California Tax Credit Allocation Committee, the California Debt Limit Allocation Committee, or the Los Angeles Housing Department) to facilitate compliance with requirements of the governmental program providing tax credits, bonds, or other financing. This is a deviation from HUD’s previous “one-size-fits-all” approach for use of the Subordination Agreement. However, negotiated Subordination Agreements remain subject to review and approval by the Assistant General Counsel of the Multifamily Mortgage Division and HUD Headquarters Office of Multifamily Housing. Additionally, once a final form of negotiated Subordination Agreement has been agreed upon and approved, it shall become a uniform HUD template to be used in all subsequent transactions involving that particular state/local government program. Thus, Subordination Agreement forms negotiated between HUD and the various state and local government agencies will likely be put into final template form without input from all potentially affected parties.
• Limited Authority to Negotiate Subordinate Business Terms. Hub Directors have been given authority to permit limited changes to the business terms of the Subordination Agreement and HUD Rider/Amendment to Restrictive Covenants (Closing Guide part 5.3) as are necessary due to the unique characteristics of a given transaction. However, changes to legal terms of the documents remains prohibited without the approval of the Assistant General Counsel for the Multifamily Mortgage Division. It is unclear where HUD draws the distinction between “business terms” and “legal terms.” However, the Closing Guide now implies that survival of affordability restrictions upon foreclosure is a “business term” because it expressly authorizes Hub Directors to permit survival of such restrictions under certain circumstances.
Use of the revised 2013 Closing Guide is now mandated for all closings after May 1, 2013. Developers and owners planning to use FHA financing must now carefully consider any deal-specific terms that may require modification of the HUD documents. Where modification of the HUD documents is required, developers and owners must to allow for additional time to negotiate and obtain approval of any modifications from HUD Headquarters.
It also should be noted that the current version of HUD’s Multifamily Accelerated Processing Guide (the “MAP Guide”) is set to expire in February 2014. Given HUD’s plan to consolidate the operations of its multifamily field offices and given the changes to the Closing Guide noted in this briefing, we anticipate revisions of a similar nature may be made to the MAP Guide.