Proposed HOME Regulations Offer Significant Changes to Current Rule

(from Memo to Members of the NLIHC) The long-awaited proposed changes to the HOME program regulations were published in the Federal Register on December 16. Select features of the proposed rule are highlighted here, with an emphasis on multifamily housing and community housing development organizations (CHDOs). Comments on the proposed regulations are due February 14, 2012.

Troubled HOME-Assisted Rental Projects

A new section of the regulations is proposed to facilitate preservation of financially troubled HOME-assisted rental projects at risk of failure or foreclosure. If operating costs significantly exceed operating revenue, a project will be considered no longer financially viable. HUD would be able to allow a jurisdiction to invest additional HOME funds in the project, as long as the original investment plus the additional investment did not exceed the per-unit subsidy limit in the current regulations. In addition to rehabilitation, the additional funds could be used for recapitalization of project reserves for the HOME units. The new rule would allow, but not require, HUD to extend the affordability period. HUD could also permit the jurisdiction to reduce the number of HOME-assisted units in the project, but only if the project has more than the minimum number of required HOME units.

Rental Housing Provisions

The proposed rule would require a jurisdiction to submit marketing information and, if appropriate, a marketing plan if multifamily housing is not occupied by eligible tenants within a time period specified by HUD following the date of project completion. The preamble to the proposed rule specifically seeks suggestions about the length of such a time period, and offers examples of a period that is no less than 90 days but no more than six months.

HUD will require repayment of HOME funds for any unit that is not rented to eligible tenants 18 months after project completion. The proposed rule would be revised to specifically state that HOME rent limits include both rent and utilities or utility allowance.

Under the existing rule, in a rental project with five or more HOME-assisted units, 20% of the HOME-assisted units must be occupied by households with incomes below 50% of area median income who pay “low HOME rents.” The proposed rule would make it clear that jurisdictions may designate more than 20% of units in a project as low HOME rent units regardless of project size. Low HOME rent is either a fixed rent that does not exceed 30% of the annual income of a hypothetical household whose income does not exceed 50% of the area median income, or a rent that is less than 30% of a household’s income.

Current regulations require on-site inspections annually if there are more than 26 units, every other year if there are five to 25 units, and every three years if there are one to four units. HUD proposes to reduce on-site inspections to every three years regardless of the number of units. The proposed rule also details which items must be assessed in a statistically valid sample of units for inspection, depending on the number of HOME-assisted units in a property.

The proposed rule would require jurisdictions to examine annually the financial condition of rental projects. The preamble states that this would apply to projects with at least ten HOME-assisted units, but the proposed text of the rule does not specify a threshold number of units.

Tenant-Based Rental Assistance (TBRA)

New language would expressly state that HOME can be used to pay utility deposits in conjunction with HOME TBRA or security deposit assistance. However, stand-alone utility deposit assistance is not eligible.

Existing regulation allows TBRA to be targeted to those with special needs. The proposed rule adds that participation may be limited to persons with a specific disability if doing so is necessary to provide housing, aid, benefit or services that are as effective as those provided to others.

The proposed rule would allow use of HOME TBRA to be tied to a self-sufficiency program in which a family is required to participate as a condition of selection for TBRA. However, people with disabilities may not be required to participate in medical or disability-related services as part of a self-sufficiency program. A family’s failure to continue participation would not be a permitted basis for terminating assistance, but renewal of TBRA could be a conditioned on participation.

HUD proposes to allow TBRA for a lease-purchase homebuyer program for a period of up to 36 months.

Tenant Protections

A number of tenant protection features would be added, including:

• There must be a written lease for all HOME-assisted rental units and units rented by recipients of HOME TBRA.

• Supportive services related to a disability cannot be mandatory.

• An increase in a tenant’s income does not constitute good cause for termination or refusal to renew.

• A tenant’s failure to follow a transitional housing services plan is a permissible basis for terminating a tenancy or refusing to renew a lease.

• If an owner converts rental units to homeownership units, a tenant’s refusal to purchase their unit does not constitute grounds for eviction or for failure to renew the lease.

HOME Funds and Public Housing

A new section of the rule would allow HOME to be used to develop HOPE VI units, as long as federal capital funds received by a public housing agency (PHA) are not also used to develop the HOPE VI units. These units could, however, receive operating assistance from the PHA’s federal public housing operating fund, and they could also subsequently receive capital funds for modernization and rehabilitation. The HOME statute prohibits using HOME for public housing.

Ineligible Activities

Jurisdictions may not charge low income beneficiaries for various administrative costs such as construction management fees, loan processing fees, loan servicing fees, and underwriting fees. However, the preamble states that jurisdictions could charge reasonable and customary fees such as credit reports and appraisal fees. Project owners could charge nominal application fees, as allowed under the current rule, but the proposed rule adds that such fees may not create an undue impediment to participation by low income households. Owners of rental projects could not charge tenants fees that are not reasonable and customary, such as a monthly fee for access to laundry facilities.

Termination and Repayment

The proposed rule adds a new feature specifying that projects not completed within four years from the date of project commitment are deemed terminated and the jurisdiction must return all funds to its HOME account. The jurisdiction may request a 12-month extension from HUD by submitting information about the project’s status, steps being taken to overcome obstacles, proof of adequate funding, and a schedule with milestones for completion.

Related Consolidated Plan Changes

The Annual Action Plans of Consolidated Plans would require jurisdictions to describe applicants eligible to apply for funds, as well as the jurisdiction’s process for soliciting and funding applications. HUD would allow jurisdictions to limit beneficiaries or give preferences to a particular segment of the low income population, but only if described in the Action Plan. Some jurisdictions have sought to target rental projects to artists or nurses, and homeownership to police or teachers.

Community Housing Development Organizations (CHDOs)

The HOME statute requires that at least 15% of a jurisdiction’s HOME allocation be reserved for use by CHDOs, which are to be accountable to the low income communities they serve, primarily by requiring their governing boards to have significant representation by low income community residents. The proposed rule has a number of changes pertaining to CHDOs:

• Existing rules require a CHDO to have demonstrated capacity for carrying out HOME-assisted activities, but allows an organization to demonstrate capacity by engaging an experienced consultant who can both carry out HOME-assisted activities and also train key staff so that they can gain the needed capacity. HUD is concerned that some CHDOs have relied on consultants without developing internal capacity. Therefore, the proposed rule would eliminate the use of consultants to meet the demonstrated capacity requirement; a CHDO must have paid employees on staff with housing development experience. In addition, the proposed rule would also specify that volunteers or donated staff do not meet the demonstrated capacity requirement.

• Jurisdictions will have to certify that an organization meets the CHDO definition and that the organization has the capacity to own, develop, or sponsor housing each time CHDO funds are committed to it.

• The definition of “commitment” of HOME funds would remove references to reserving funds to CHDOs because such reservations are not project-specific. Funds will be considered “reserved” when there is a written agreement between the jurisdiction and the CHDO committing funds to a specific project.

• The proposed rule would require jurisdictions to commit CHDO funds within 24 months; the existing rule merely requires a general “reservation.” In addition, to provide an incentive for jurisdictions to move CHDO set-aside funds from nonperforming CHDOs to those that are performing well, the proposed rule would require HUD to reduce or recapture CHDO funds not expended within five years.

• Currently, the rule allows a jurisdiction to use up to 5% of its allocation for CHDO general operating expenses. The proposed rule would clarify that CHDO operating funds are separate from and are not intended to supplant the 15% CHDO set-aside funds.

• If a for-profit entity creates a CHDO, its officers and employees could not be officers or employees of the CHDO, and the CHDO could not use the for-profit entity’s office space. This is intended to prevent the CHDO from being influenced by the profit motive of the for-profit entity.

• Existing rules allow a public entity to create a CHDO as long as no more than one third of the CHDO’s governing board is appointed by the public entity and no more than one third are public officials or employees of the HOME participating jurisdiction. The proposed rule is revised to stress that the CHDO is not allowed to be controlled by a government entity, whether a jurisdictions or other entity such as a housing finance agency. It further specifies that officers or employees of a government entity may not be officers or employees of the CHDO, and the CHDO may not use office space of a government entity.

The proposed rule also contains considerable revisions to other categories not covered in this article, including changes to Maximum Per Unit Subsidy Amount, Property Standards, and Qualification as Affordable Housing for Homeownership Housing.

The December 16 proposed rule is at http://www.gpo.gov/fdsys/pkg/FR-2011-12-16/pdf/2011-31778.pdf