www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER AUG - 3 1994 Mortgagee Letter 94-38 TO: ALL HUD-APPROVED MULTIFAMILY MORTGAGEES SUBJECT: DISPOSITION OF FIRE and HAZARD INSURANCE PROCEEDS The Department published regulation changes on June 17, 1994, that affect disposition of multifamily fire and hazard insurance proceeds. Enclosed for your convenience are copies of these changes. Sincerely yours, Nicolas P. Retsinas Assistant Secretary for Housing Federal Housing Commissioner Enclosure _____________________________________________________________________ 31140 Federal Register / Vol. 59, No. 116 / Friday, June 17, 1994 / Rules and Regulations =========================================================================== 1 of 3 DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT Office of the Assistant Secretary for Housing--Federal Housing Commissioner 24 CFR Parts 207, 213, 221, and 242 Docket No, R-94-1723; FR-3603-F-01 RIN 2502-AG19 Disposition of Fire and Hazard Insurance Proceeds AGENCY: Office of the Assistant Secretary for Housing--Federal Housing Commissioner, HUD. ACTION: Final rule. __________________________________________________ SUMMARY: This rule revises certain provisions in HUD regulations covering multifamily mortgage insurance which have the effect of requiring prior HUD endorsement before the expenditure of any fire and hazard insurance loss proceeds by mortgagees. Instead of this requirement the regulations would be revised to allow loss proceeds to be expended to restore or repair the property without prior HUD approval. The proceeds may not however, be used for any other purposes without prior HUD approval. EFFECTIVE DATE: July 18, 1994. FOR FUTURE INFORMATION CONTACT: James Tahash, Planning and Procedures Division, Office of Multifamily Housing Management, Room 6182, Department of Housing and Urban Development, 451 Seventh Street, SW, Washington, DC 20410, voice (202) 708-3944, TDD (202) 7084594. (These are not toll-free numbers.) SUPPLEMENTARY INFORMATION: Under existing HUD regulations (24 CFR 207.260) in the event a loss occurs to the _____________________________________________________________________ 31140 Federal Register / Vol. 59, No. 116 / Friday, June 17, 1994 / Rules and Regulations =========================================================================== 2 of 3 mortgaged property under any policy of fire or other hazard insurance and the mortgagee has received the proceeds therefrom, it shall not exercise its option under the mortgage to use the proceeds of the insurance for the repairing, replacing, or rebuilding of the premises, or apply them to the mortgage indebtedness, or make any other disposition of the proceeds without the prior written approval of the Commissioner. Through cross-referencing this requirement is also made applicable to other FHA multifamily programs i.e. Part 213 Cooperative Housing Mortgage Insurance, Part 220 Mortgage Insurance and Insured Improvement Loans for Urban Renewal and Concentrated, Development Areas, Part 221 Low Cost and Moderate Income Mortgage Insurance, Part 231 Housing Mortgage Insurance for the Elderly, Part 232 Mortgage Insurance for Nursing Homes, Intermediate Care Facilities, and Board and Care Homes, Part 234 Condominium Ownership Mortgage Insurance, Part 236 Mortgage Insurance and Interest Reduction Payments for Rental Projects, Part 241 Supplementary Financing for Insured Project Mortgages and Part 242 Mortgage Insurance for Hospitals. This rule revises current regulatory requirements to provide that the mortgagee may exercise its option to use the insurance proceeds for the repairing, replacing or rebuilding of the premises without prior HUD approval. It may not however make any other disposition of insurance proceeds without prior approval. The Department has found that its Field Office staff resources can be more effectively allocated to tasks other than the endorsing of property insurance loss drafts where the proceeds, in any event, are going to be used to restore or repair the property. We estimate that from $10,000 to $20,000 per year in staff resources could be saved by making this change. Mortgagees could have similar _____________________________________________________________________ 31140 Federal Register / Vol. 59, No. 116 / Friday, June 17, 1994 / Rules and Regulations =========================================================================== 3 of 3 savings (from reduction of paperwork and check cashing steps) of from $5,000 to $10,000 per year. Project owners also could have savings. Approximately 20,000 project owners, their mortgagees and their insurance agents and companies should benefit by eliminating this unnecessary procedural step. The rule also makes conforming revisions to 24 CFR 207.10, 213.13, 221.521 and 242.43 of HUD regulations to provide that fire and hazard and insurance have attached a standard mortgagee clause making loss payable to the mortgagee, its successors and assigns rather than the current requirement that loss be payable to the mortgagee and the Commissioner as their interests may appear. Due to the strictly technical nature of this rule, the Department has determined that the notice and public comment procedure under Title 5 of the United States Code is unnecessary and is therefore issuing this document as a final rule. Procedural Matters Executive Order 12866--Regulatory Planning and Review This rule was reviewed by the Office of Management and Budget under Executive Order 12866, Regulatory Planning and Review. Any changes made to the rule as a result of that review are clearly identified in the docket file which is available for public _____________________________________________________________________ Federal Register / Vol, 59, No. 116 / Friday, June 17, 1994 / Rules and Regulations 31141 =========================================================================== 1 of 5 inspection in the office of the Department's Rules Docket Clerk, room 10276, 451 Seventh Street SW., Washington, DC. Regulatory Flexibility Act In accordance with 5 U.S.C. 605(b) (the Regulatory Flexibility Act), the undersigned hereby certifies that this rule does not have a significant economic impact on a substantial number of small entities. This rule is technical in nature. It effects no substantive changes in HUD programs or policies. Semiannual Agenda This rule was listed as item 1569 in the Department's Semiannual Agenda of Regulations published on April 25, 1994 (59 FR 20424, 20444) under Executive order 12866 and the Regulatory Flexibility Act. Executive Order 12612, Federalism The General Counsel, as the Designated Official under section 6(a) of Executive order 12612, Federalism, has determined that the policies contained in this rule do not have Federalism implications and, thus, are not subject to review under the Order. No programmatic or policy changes result from this rule's promulgation which would affect existing relationships between the Federal Government and State and local governments. Executive Order 12606, The Family The General Counsel, as the Designated Official under Executive order 12606, The Family, has determined that this rule does not have potential for significant impact on family formation, maintenance, and general well-being, and, thus, is not subject to review under the Order. The _____________________________________________________________________ Federal Register / Vol, 59, No. 116 / Friday, June 17, 1994 / Rules and Regulations 31141 =========================================================================== 2 of 5 rule is technical in nature and makes no significant change in existing HUD policies or programs. Environment An environmental assessment is unnecessary, since internal administrative procedures whose content do not constitute a development decision affecting the physical condition of specific project areas or building sites is categorically excluded from the Department's National Environmental Policy Act procedures under 24 CFR 50.20(k). List of Subjects 24 CFR Part 207 Manufactured homes, Mortgage insurance, Reporting and recordkeeping requirements, Solar energy. 24 CFR Part 213 Cooperative Mortgage Insurance, Reporting and recordkeeping requirements. 24 CFR Part 221 Low and moderate income housing, Mortgage insurance, Reporting and recordkeeping requirements. 24 CFR Part 242 Hospitals, Mortgage insurance, Reporting and recordkeeping requirements. Accordingly, 24 CFR parts 207, 213, 221, and 242 are amended to read as follows: _____________________________________________________________________ Federal Register / Vol, 59, No. 116 / Friday, June 17, 1994 / Rules and Regulations 31141 =========================================================================== 3 of 5 PART 207--MULTIFAMILY HOUSING MORTGAGE INSURANCE 1. The authority citation for 24 CFR part 207 continues to read as follows: Authority: 12 U.S.C. 1713 and 1715b; 42 U.S.C. 3535(d). Sections 207.258 and 207.258b are also issued under 12 U.S.C. 1701z-11(e). 2. Section 207.10 is revised to read as follows: 207.10 Covenant for fire Insurance. The mortgage shall contain a covenant acceptable to the Commissioner binding the mortgagor to keep the property insured by a standard policy or policies against fire and such other hazards as the Commissioner, upon the insurance of the mortgage, may stipulate, in an amount which will comply with the coinsurance clause applicable to the location and character of the property, but not less than 80 percent of the actual cash value of the insurable improvements and equipment of the project. The initial coverage shall be in an amount estimated by the Commissioner at the time of completion of the entire project or units thereof. The policies evidencing such insurance shall have attached thereto a standard mortgagee clause making loss payable to the mortgagee, its successors and assigns 3. Paragraph (e) of 207.260 is revised to read as follows: 207.260 Protection of mortgage security. * * * * * (e) Application of insurance proceeds. (1) In the event a loss has occurred to the mortgaged property under any policy of fire or other hazard insurance and the mortgagee has received the proceeds therefrom, it may exercise its option under the mortgage to use the _____________________________________________________________________ Federal Register / Vol, 59, No. 116 / Friday, June 17, 1994 / Rules and Regulations 31141 =========================================================================== 4 of 5 proceeds of such insurance for the repairing, replacing, or rebuilding of the premises. It may not make other disposition of such proceeds, without the prior written approval of the Commissioner. (2) If the proceeds are applied to the mortgage with such prior written approval and result in the payment in full of the entire mortgage indebtedness, the contract of mortgage insurance made with the Commissioner shall thereupon terminate. (3) If the Commissioner shall fail to give his approval to the use or application of such funds within 60 days after written request by the mortgagee, the mortgagee may use or apply such funds for any of the purposes specified in the mortgage without the approval of the Commissioner. PART 213--COOPERATIVE HOUSING MORTGAGE INSURANCE 4. The authority citation for 24 CFR part 213 continues to read as follows: Authority: 12 U.S.C. 1715b, 1715e; 42 U.S.C. 3535(d). 5. Section 213.13 is revised to read as follows: 213.13 Covenant for fire Insurance. The mortgage shall contain a covenant acceptable to the Commissioner binding the mortgagor to keep the property insured by a standard policy or policies against fire and such other hazards as the Commissioner, upon the insurance of the mortgage, may stipulate, in an amount which will comply with the coinsurance clause applicable to the location and character of the property, but not less than 80 percent of the actual cash value of the insurable improvements and equipment of the project. The initial coverage shall be in _____________________________________________________________________ Federal Register / Vol, 59, No. 116 / Friday, June 17, 1994 / Rules and Regulations 31141 =========================================================================== 5 of 5 an amount estimated by the Commissioner at the time of completion of the entire project or units thereof. The policies evidencing such insurance shall have attached thereto a standard mortgagee clause making loss payable to the mortgagee, its successors and assigns. PART 221--LOW COST AND MODERATE INCOME MORTGAGE INSURANCE 6. The authority citation for 24 CFR part 221 is revised to read as follows: Authority: 12 U.S.C. 1715b and 1715l; 42 U.S.C. 3535(d); sec. 221.544(a)(3) is also issued under 12 U.S.C. 1707(a). 7. Section 221.521 is revised to read as follows: 221.521 Covenant for fire insurance. The mortgage shall contain a covenant acceptable to the Commissioner binding the mortgagor to keep the property _____________________________________________________________________ 31142 Federal Register / Vol. 59, No. 116 / Friday, June 17, 1994 / Rules and Regulations =========================================================================== 1 of 2 insured by a standard policy or policies against fire and such other hazards as the Commissioner, upon the insurance of the mortgage, may stipulate, in an amount which will comply with the coinsurance clause applicable to the location and character of the property, but not less than 80 percent of the actual cash value of the insurable improvements and equipment of the project. The initial coverage shall be in an amount estimated by the Commissioner at the time of completion of the entire project or units thereof. The policies, evidencing such insurance shall have attached thereto a standard mortgagee clause making loss payable to the mortgagee, its successors and assigns. PART 242--MORTGAGE INSURANCE FOR HOSPITALS 8. The authority citation for 24 CFR part 242 continues to read as follows: Authority: 12 U.S.C. 1715b, 1715n(f), 1715z-7; 42 U.S.C. 3535(d). 9. Section 242.43 is revised to read as follows: 242.43 Covenant for fire Insurance. The mortgage shall contain a covenant acceptable to the Commissioner binding the mortgagor to keep the property insured by a standard policy or policies against fire and such other hazards as the Commissioner, upon the insurance of the mortgage, may stipulate, in an amount which will comply with the coinsurance clause applicable to the location and character of the property, but not less than 80 percent of the actual cash value of the insurable improvements and equipment of the project. The initial coverage shall be in an amount estimated by the Commissioner at the time of completion of the entire project or units thereof. The _____________________________________________________________________ 31142 Federal Register / Vol. 59, No. 116 / Friday, June 17, 1994 / Rules and Regulations =========================================================================== 2 of 2 policies evidencing such insurance shall have attached thereto a standard mortgagee clause making loss payable to the mortgagee, its successors and assigns. Dated: June 9, 1994. Nicolas P. Retsinas, Assistant Secretary for Housing-Federal Housing Commissioner. FR Doc. 94-14744 Filed 6-16-94; 8:45 am BILLING CODE 4210-27-P