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Amendments to HUD's Civil Money Penalty Regulations
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[Federal Register: December 6, 2001 (Volume 66, Number 235)]
[Rules and Regulations]
[Page 63435-63443]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06de01-10]
[[Page 63435]]
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Part II
Department of Housing and Urban Development
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24 CFR Part 30
Amendments to HUD's Civil Money Penalty Regulations; Final Rule
[[Page 63436]]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 30
[Docket No. FR-4399-F-02]
RIN 2501-AC56
Amendments to HUD's Civil Money Penalty Regulations
AGENCY: Office of the Secretary, HUD.
ACTION: Final rule.
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SUMMARY: This rule implements sections 561 and 562 of the Multifamily
Assisted Housing Reform and Affordability Act of 1997. These sections
concern HUD's ability to impose civil money penalties. Section 561
expands the list of parties and violations subject to civil money
penalties related to multifamily properties. Section 562 authorizes HUD
to impose civil money penalties for violations of Section 8 project-
based housing assistance payments contracts.
DATES: Effective Date: January 7, 2002.
FOR FURTHER INFORMATION CONTACT: Dane M. Narode, Deputy Chief Counsel
for Administrative Proceedings, Departmental Enforcement Center, U.S.
Department of Housing and Urban Development, 1250 Maryland Avenue,
Suite 200, Washington, DC 20024; telephone (202) 708-2350 (this is not
a toll-free number). Hearing- or speech-impaired persons may access
this number via TTY by calling the toll-free Federal Information Relay
Service at (800) 877-8339.
SUPPLEMENTARY INFORMATION:
I. The June 26, 2000 Proposed Rule
The proposed rule proposed to implement section 561 and 562 of the
Multifamily Assisted Housing Reform and Affordability Act of 1997 (Pub.
L. 105-65, Title V, 111 Stat. 1384) (the MAHRA), the purpose of which
is to enhance enforcement against multifamily mortgagors and Section 8
owners who violate program requirements. Section 561 of the MAHRA
amended the National Housing Act at 12 U.S.C. 1735f-15, ``Civil Money
Penalties Against Multifamily Mortgagors,'' to expand the parties
against whom HUD may seek a civil money penalty, as well as the
violations potentially subject to a civil money penalty. Under the law,
civil money penalty liability can extend to mortgagors, general
partners of mortgagors, officers or directors of corporate mortgagors,
identity of interest agents, and members of limited liability companies
that are mortgagors or partners of partnership mortgagors. Additional
violations for which HUD may seek a civil money penalty under section
561 include failure to maintain the mortgaged property, failure to
provide acceptable management, and failure to properly maintain the
books and accounts of the mortgaged property in accordance with HUD
requirements.
Section 562 of the MAHRA added a new section to the U.S. Housing
Act of 1937, codified at 42 U.S.C. 1437z-1, entitled ``Civil Money
Penalties Against Section 8 Owners.'' Under this section, potentially
liable parties include owners, their general partners in the case of a
partnership owner, and identity of interest agents. A penalty may be
imposed for any knowing and material breach of a housing assistance
payments contract, including failure to provide decent, safe and
sanitary housing, and knowing submission of false or fraudulent
statements or requests for housing assistance payments to HUD or any
other government agency.
The final rule implements these sections by amending the existing
civil money penalty regulations at 24 CFR part 30. Section 561 of the
MAHRA is implemented at Sec. 30.45. Amendments to that section include
new definitions, including definitions of ``identity of interest
agent'' and further definitions of terms used within that definition.
The section also incorporates the amended statutory list of violations
for which HUD may seek a civil money penalty. Section 562 of the MAHRA
is implemented in a new 24 CFR 30.68.
II. This Final Rule
The public comment period on the proposed rule closed on August 25,
2000. HUD received 11 comments. Five were from trade associations
representing housing owners or managers, four were from groups
representing tenants, one was from a management corporation on its own
behalf, and one was from an individual owner.
III. Public Comments
A. Comments Arguing That the Rule Unfairly Burdens Mortgagors/Owners
Comment: The potential maximum penalty will cause financial
hardship to small owners. Many of the owners subject to the rule are
single asset entities with only the one property and the related
assistance as their sole source of income. Many of these are small
businesses or non-profits with limited outside revenue, individuals,
elderly, and other like entities. These owners cannot afford the
maximum $30,000 penalty being proposed. The reason such owners often
fail to maintain properties or submit audited financial statements are
income shortages, and the proposed penalty will only exacerbate the
problem.
Response: While the maximum amount of civil money penalty is set as
a statutory matter, the rule does not require HUD to assess the maximum
civil penalty in any given case of a violation subject to such penalty.
Rather, in assessing a penalty, HUD, by statute, must assess a variety
of factors, including an entity's ability to pay. (See 12 U.S.C. 1735f-
15(d)(3); 12 U.S.C. 1701q-1((d)(3); and 42 U.S.C. 1437z-1(c)(3)(C).)
HUD's civil money penalty regulations implement this statutory
requirement at 24 CFR 30.80(c). Thus, there is already sufficient
statutory and regulatory protection of small owners. HUD has made no
change to the rule as a result of this comment.
Comment: The cash flow from assisted projects can be too low for
owners to fully comply with all HUD standards. It is unfair to require
owners to maintain projects at a higher level than the project income
allows. There needs to be balance in the system so that owners who are
doing a good job of managing the project within the constraints of the
rent they can charge are not subject to penalties. It is not fair to
require owners to reach into their own pockets to supplement the rent.
HUD field officials should be trained in this standard.
Response: HUD is required to consider ``the gravity of the
offense'' and ``the degree of the violator's culpability'' when
determining whether to seek a civil money penalty and, if so, how much
to seek. (See 24 CFR 30.80(a) and (h).) These mandatory considerations
should provide sufficient protection to the owner in the scenario
described, where an owner is generally doing a good job but is found to
have committed a violation. In addition, HUD expects owners with income
shortfalls to seek relief that may be available, including budget-based
rents or other permitted rent increases, or mortgage restructuring, if
applicable. If such relief is available and an owner fails to seek it,
HUD will consider that failure as part of its analysis of the gravity
of the offense and the degree of culpability. Nonetheless, lack of
income is not per se an excuse for an owner's failure to comply with
legal obligations. Civil money penalties are always a potential result
of failure to comply.
As to the commenter's request that HUD provide training, the
Departmental Enforcement Center currently provides employees engaged in
the civil penalty process with adequate training in applying HUD's
regulations on such
[[Page 63437]]
penalties, including the standards discussed above. For these reasons,
HUD makes no change to the rule as a result of this comment.
Comment: Since owners generally rely on HAP payments to correct
violations, and since the owners face civil money penalties if they
apply for HAP payments knowing that violations exist, there would never
be funds available to correct the violations and return the property to
compliance. Therefore, the procedures should allow for an evaluation of
the cause of a property's financial distress before imposing monetary
penalties.
Response: HUD existing procedures allow sufficient flexibility to
consider a variety of circumstances. These procedures include a general
requirement that HUD consider ``such matters as justice may require,''
24 CFR 30.80(j). However, HUD believes that it is important that the
agency retain maximum flexibility regarding civil penalties, within the
general standards and procedures stated in the regulations. Therefore,
after consideration, HUD has decided not to change the rule to address
the specific situation raised by the comment. Rather, as to that
situation and other individual situations that may arise, owners can
consult with legal counsel and/or HUD field office staff, as
appropriate.
Comment: Civil money penalties will be ``detrimental'' to housing
managers and hinder the operation of their properties.
Response: While HUD considers the ability to pay in assessing a
civil money penalty under 24 CFR 30.80(c), it is also true that the
purpose of civil money penalties is to provide a disincentive for a
manager, or any party statutorily subject to civil money penalties, to
violate its legal obligations regarding HUD-assisted housing
developments. Thus, the fact that civil money penalties might be
detrimental does not argue against their imposition in appropriate
cases. HUD makes no change to the rule as a result of this comment.
B. Comments on the Proposed Amount of Penalties
Comment: HUD should seek penalties appropriate to the violations,
and not excessive penalties. A number of commenters stated that the
amount of penalties should not be excessive and should relate to the
severity of the violation, the financial condition of the violator, and
whether there was good faith in attempting to comply with HUD
regulations. Some commenters specifically cited the Small Business
Regulatory Flexibility Act (``SBRFA''), 5 U.S.C. 612(b), and one
commenter stated that some of the SBRFA policies should be incorporated
into the final rule so that owners and managers will have a basic
understanding of them.
Response: HUD's existing regulations governing civil penalties
within which the new rule will be codified already provide for
consideration of these factors. The regulations require consideration
of, among other things, the gravity of the offense (24 CFR 30.80(a));
the violator's ability to pay (which of necessity includes the
financial condition)(24 CFR 30.80(c)); and whether there was good faith
(24 CFR 30.80(h)). Furthermore, in order to assess a civil penalty, HUD
must show that there was a ``knowing and material'' violation. (See,
e.g., 24 CFR 30.45(b)(1)(ii) and (c).) Lack of knowledge would be a
form of good-faith defense that a respondent could raise. Regarding
SBRFA-related matters, HUD has fully complied with SBRFA requirements,
and has published material on its SBRFA policies, so that it is not
necessary to repeat this material in each individual rule. For more
information, please see below the section entitled ``Small Entities and
HUD Enforcement Actions.'' In addition, information on HUD's SBRFA
policies can be found on the World Wide Web by choosing the ``Small
Business'' link from HUD's home page, http://www.hud.gov 
, and clicking
on the link to ``1996 Law (SBREFA).''
Comment: Civil money penalties could be crippling in many
circumstances, and owners and managers need a clear understanding of
their exposure to deter potential wrongdoing.
Response: Under its current statutory authority to assess civil
money penalties for multifamily housing, section 202 and section 811
developments, as adjusted under the Federal Civil Penalties Inflation
Adjustment Act of 1990, 28 U.S.C. 2461 note, HUD may assess a civil
money penalty of up to $30,000. For section 8 properties, the Inflation
Adjustment Act currently does not result in an increase above the
original $25,000 statutory amount (See 42 U.S.C. 1437z-1(b)(3)). Owners
and managers should consider these amounts their maximum potential
civil money penalty exposure. (For the pre-adjustment penalty for
multifamily housing, see 12 U.S.C. 1715f-15(c)(2).) See the preamble to
the proposed rule for an explanation as to the section 202 and 811
programs, 65 FR 39502-39504 (June 26, 2000).)
Comment: Four commenters supported increased civil money penalties.
One also supported the expansion of parties potentially subject to
civil money penalties. Others stated that aggressive enforcement of
civil money penalties is the best remedy to insure that tenants get
decent homes and HUD funds are spent wisely.
Response: These comments do not seek any change in the regulation.
Therefore, no change is necessary as a result.
C. Comments Raising Fairness Concerns
Five commenters raised concerns regarding the fairness of civil
money penalties. These comments concerned hypothetical situations where
HUD contributes to a violation; false statement provisions; due process
concerns; and a concern that potential civil money penalties will
encourage owners to opt out of assisted housing programs.
Comment: A provision prohibiting HUD from assessing penalties in
the case of misconduct by HUD should be more fully implemented in the
rule. Three commenters stated that, as to Section 8 owners, the rule
implements the statutory provision that HUD may not impose penalties if
a material cause of the violation is the failure of HUD or a PHA to
comply with an existing agreement at 24 CFR 30.68(e) (see 42 U.S.C.
1437z-1(a)(2). However, the rule does not implement a similar provision
in 12 U.S.C. 1735f-15(a) relating to HUD-assisted mortgagors. In
addition, the rule should provide examples of HUD actions to which this
provision would apply. One of the three commenters cited, as an
example, HUD denials of requests for rent increases, which the
commenter argued made it unfair for HUD to impose penalties for non-
compliance. Another commenter similarly argued that the rule should not
allow HUD to take any enforcement action until the agency has ``fully
complied'' with its obligations under the regulatory agreement between
the owner and HUD.
Response: The commenters correctly observe that the provision in
question regarding failure to comply with existing agreements is found
in both authorizing statutes that this rule implements. Therefore, HUD
sees no reason why HUD should not implement the parallel provision in
Sec. 30.45. Indeed, failure to do so could be misunderstood to indicate
that HUD intended to implement this provision for the Section 8 program
only. Therefore, in accordance with this comment, HUD revises the
proposed rule to implement this provision in Sec. 30.45.
However, HUD disagrees with the commenters' assertion that HUD
should provide examples of conduct to which this provision would apply,
or address
[[Page 63438]]
the specific issue of the regulatory agreement. In particular, HUD
disagrees with the commenter's example, citing a denial of a rent
increase as cause for excuse from civil money penalties for
noncompliance with HUD regulations. In most circumstances, the ordinary
denial of a requested rent increase would not be an example of a
failure to comply with an existing agreement, and would not insulate
the owner from civil money penalties. Rather, such requests would be
assessed in accordance with the regulatory requirements governing them,
and approved or denied based on those requirements. As to the comment
regarding theoretical future failures of HUD to ``fully comply'' with
the regulatory agreement, HUD believes that the issue of whether a
failure to comply with an agreement has occurred, and amounts to a
violation of the agreement that constitutes a material cause of the
owner's malfeasance, is of necessity controlled by the facts of
particular cases, and is best examined on a case by case basis in the
hearing process. Therefore, HUD makes no change other than to add the
parallel provision.
Comment: The provision allowing for civil money penalties to be
imposed on Section 8 owners in the case of false statements or false
requests to HUD for housing assistance payments is unfair. Two
commenters stated that, since it is impossible to determine that each
unit is ``decent, safe and sanitary'' each day, the certification on
the HAP voucher exposes the owner to a penalty with each submission. It
would be an impossible administrative burden for owners to inspect each
unit prior to submission on the voucher. In addition, minor technical
violations could unfairly lead to large civil money penalties.
Therefore, standards need to be set so that de minimis inaccuracies in
vouchers, which can always be found, do not lead to civil penalties.
Response: In order to be liable for civil penalties, an owner must
make a ``knowing or willful'' false submission or statement. While it
is impossible to comment on future situations that may or may not
arise, in the type of hypothetical scenario described by the comment,
the submission might not be ``knowing'' or ``willful,'' and so might
not meet the standard for assessing a civil penalty. Of course, this
response does not relieve each owner of the responsibility to make
reasonable and timely efforts to ascertain the condition of the project
and take appropriate corrective action when necessary. In close cases,
HUD is still obligated to consider the gravity of the offense and the
degree of culpability (see 24 CFR 30.80(a) and (h)). Of course, HUD
will consider each case on its merits. In questionable cases, potential
respondents are advised to consult with the HUD field office as well as
their own counsel. However, the rule as currently written is flexible
enough to deal with the commenter's concern, and so no further
modification of the rule is necessary.
Comment: Owners will opt out of HUD programs. The proposed rule
provides another incentive for owners to opt out at the earliest
opportunity. There should be reasonable procedures whereby good owners
will not be fined for minor and technical violations. It should be
HUD's goal to create incentives for owners who want to stay in HUD's
programs.
Response: Reasonable procedures regarding minor and technical
violations are already in place. For example HUD is required to
consider the gravity of the offense when determining the amount of a
civil money penalty. 12 U.S.C. 1735f-15(d)(3); 12 U.S.C. 1701q-1(d)(3);
42 U.S.C. 1437z-1(c)(3)(A), implemented at 24 CFR 30.80(a). In
addition, HUD has provided incentives for owners to remain in
multifamily assisted housing programs, including mark-to-market and
mark-up-to market. Whether or not particular owners will choose to opt
out rather than pay civil money penalties is purely hypothetical. In
any case, HUD must enforce its program rules, which are for the benefit
of tenants and the taxpaying public.
D. Due Process Concerns
Comment: One commenter stated that since the rule does not include
a detailed appeals procedure, it violates due process.
Response: The commenter is incorrect. Although these particular
revisions to 24 CFR part 30 do not include a separate appeals
procedure, the general procedures incorporated into part 30, where
these sections will be codified, applies. Under 24 CFR 30.95, hearings
regarding part 30 civil money penalties are to be conducted under the
procedures in 24 CFR part 26, subpart B. This subpart contains complete
hearing procedures that comply with due process, including higher-level
administrative appeal and judicial review provisions. Furthermore,
judicial review is authorized by the underlying statutes. (See 12
U.S.C. 1735f-15(e) and 42 U.S.C. 1437z-1(d)). Therefore, no change is
necessary as a result of this comment.
Comment: One commenter stated that the rule should provide that
civil penalties cannot be imposed until the appeals process is
completed.
Response: Generally, the authorizing statutes provide that a civil
penalty may be imposed only after the respondent ``has received notice
and an opportunity for a hearing on the record.'' (See 12 U.S.C. 1735f-
15(d)(1)(B) and 42 U.S.C. 1437z-1(c)(1)(B)). Thus, HUD has authority to
impose the penalty at that point, and sees no reason to refrain from
imposing a penalty at the time of the initial decision if the
respondent is found liable. While respondents have the right to seek a
stay of the penalty during the appeals process, HUD does not believe an
automatic stay for all cases would be in the public interest, since
some cases may involve egregious acts of noncompliance for which a stay
would not be appropriate.
E. Use of Funds Collected Through Civil Penalties
Three commenters suggested uses of the funds collected through the
civil penalty process to benefit the specific project found liable.
Comment: Since the ultimate goal is to provide decent, safe and
sanitary housing, HUD should permit the penalty or a payment in lieu of
the penalty to be paid to the project to fix the underlying problems.
Response: The law does not permit the suggested payment of
penalties. Penalties collected from multifamily and Section 202 owners
may only be deposited in the Flexible Subsidy fund established by
Section 201(j) of the Housing and Community Development Amendments of
1978. 12 U.S.C. 1735f-15(j); 12 U.S.C. 1701q-1(j). For FHA-insured or
formerly FHA-insured projects, penalties collected against Section 8
owners and agents must either be deposited in the appropriate insurance
fund or in another fund established under 42 U.S.C. 1437 (see 42 U.S.C.
1437z-1(g)(1)). For projects that are not FHA-insured, penalties
collected against Section 8 owners and agents must be applied to the
administrative costs incurred in enforcing HUD programs (see 42 U.S.C.
1437z-1(g)(2)). Since HUD cannot promulgate rules that violate Federal
law, HUD makes no change as a result of this comment.
Comment: The fines should be directed to be used by the property
solely to address any ``damage'' which was caused to the property for
failure to meet the defined level of expectation.
Response: As in the comment above, the law does not permit the
suggested application of penalties. Penalties collected from
multifamily and section 202 owners may only be deposited in the
Flexible Subsidy fund established by section 201(j) of the Housing and
Community Development Amendments
[[Page 63439]]
of 1978. 12 U.S.C. 1735f-15(j); 12 U.S.C. 1701q-1(j). Penalties
collected against Section 8 owners and agents must either be deposited
in the appropriate insurance fund or another fund established by 42
U.S.C. 1437, or applied to the administrative costs incurred in
enforcing HUD programs. 42 U.S.C. 1437z-1(g). Since HUD cannot
promulgate rules that violate Federal law, HUD makes no change as a
result of this comment.
F. Accessibility Issues
Comment: Failure to provide accessibility features required by law
should be a basis for liability for civil penalties. One commenter
stated that under Sec. 561, failure to maintain the premises should
include failure to have accessibility features required by law. Failure
to have acceptable management should include failure to grant
reasonable accommodations and other fair housing compliance as required
by law. A commenter stated that under Sec. 562, decent, safe and
sanitary housing should be changed to ``decent, safe, accessible, and
sanitary housing.''
Response: The proposed rulemaking for this rule did not put the
public on notice that violations of civil rights laws could lead to the
assessment of civil money penalties under sections 561 and 562 of the
MAHRA. HUD does not believe it can add entirely new categories of
penalties at this stage of the rulemaking, but rather would have to do
so through a new proposed rule. Therefore, HUD makes no change to this
rule as a result of these comments.
G. Additional Factors in Assessing Penalties
Two commenters argued for the inclusion of additional factors when
assessing civil money penalties.
Comment: A past pattern of violation, prior to the publication of
the final rule, and/or evidence of continuing violation should be given
``material weight'' in whether or not to establish penalties and in
establishing their amount.
Response: 24 CFR 30.80(b) requires HUD to consider any history of
past violations in determining whether to assess a civil penalty and
the amount of such penalty. Therefore, no further revision to part 30
is necessary as a result of this comment.
Comment: The rule should clarify that mortgagors/owners who are in
noncompliance with HUD procedures and management standards,
particularly those affecting tenant living conditions and security of
tenure, will be subject to penalties. For example, failure by the owner
to comply with the notice requirements for Section 8 opt-outs and/or
mortgage prepayments should be subject to penalties. Similarly, common
violations of HUD management standards stated in handbooks, such as
failure to maintain proper waiting lists for vacancies or transfers,
improper charges to tenants, violations of local and State landlord/
tenant laws and tenants' rights under leases, should be subject to
penalties.
Response: HUD agrees that the violation of programatic procedures
and standards, including the examples given by the commenter, are
indicators of unsatisfactory management. The rule has been clarified to
include this interpretation. However, the rule also makes clear that
HUD does not believe that a single programmatic violation, unless
extraordinarily serious, constitutes unacceptable management for which
a civil money penalty may be imposed.
Comment: The rule should clarify that failure to respect the right
of tenants to organize, should be subject to civil penalties. One
commenter states that rule on tenant organization did not include civil
penalties as an enforcement mechanism, and that HUD advised tenant
representatives that this was an oversight that could be corrected by a
subsequent rulemaking.
Response: HUD agrees with the comment, and the final rule has been
revised accordingly.
H. Opt-Out Projects
One commenter stated that the rule should be extended to cover
project-based Section 8 developments that opt out and convert to
preservation vouchers.
Comment: HUD has authority to apply the civil penalty rule to
projects that opt out because the MAHRAA statute which extended ``civil
monetary authority'' over Section 8 units has been amended to provide
for preservation vouchers in the event of an opt out. Doing so would
eliminate the different standards used for units receiving preservation
vouchers as opposed to project-based assistance. Ultimately, the
commenter would prefer that oversight of units receiving preservation
vouchers be transferred from PIH to the Office of Multifamily Housing.
In the meantime, HUD should seek to equalize the standards. If further
research suggests that MAHRAA, as amended, does not give HUD the
authority to do this, HUD should propose legislation to accomplish this
objective.
Response: HUD does not believe that it has the authority under the
statute being implemented by this rule to take the steps suggested by
the commenter under the MAHRAA, which states that a penalty may be
imposed for a knowing and material breach of a HAP contract. (See 42
U.S.C. 1437z-1(b)(2).) This provision applies to owners, general
partners, and identity-of-interest management agents of projects
receiving project-based Section 8, 42 U.S.C. 1437z-1(b)(1). However,
the enhanced vouchers granted to opt-out projects are generally tenant-
based, and projects receiving project-based vouchers are generally not
projects that have opted out. Thus, the statute being implemented by
this rule does not appear to grant HUD the authority over projects that
opt out as the commenter claims. Furthermore, HUD is reluctant to seek
an expansion of its civil money penalty authority until it has gained
sufficient experience to determine the effectiveness of its existing
authority. Therefore, HUD makes no change to the rule as a result of
this comment.
I. Tenant Participation in Civil Penalty Proceedings
Comment: Tenants and tenant organizations should be able to have a
voice in HUD's process for assessing civil money penalties.
Specifically, tenants should get notice of any proposed civil
penalties; access to information regarding the administrative record of
such proceedings, including all correspondence between HUD and owners
on proposed penalties; and the right to comment before HUD's final
decision. This should be done because tenants have the greatest stake
in the maintenance of HUD standards, and they aspire to be major
partners with HUD in the oversight of their homes. Allowing tenants to
participate will allow tenants to be HUD's ``eyes and ears'' and
enhance HUD's ability to gather evidence.
Response: The civil penalty process, by statute, is conducted by
the government. HUD does not believe that involvement by tenants in the
actual conduct of civil penalty cases is authorized, and therefore
declines to adopt this suggestion.
As to the portion of the comment seeking information regarding
ongoing civil penalty proceedings, the Freedom of Information Act would
apply to those requests.
J. Clarification of Terms
Five commenters requested that the meaning of various terms used in
the rule be clarified.
Comment: The definition of ``ownership interest in'' is too broad
and should be clarified to mean persons holding legal title to
interests in the subject entity.
[[Page 63440]]
Response: HUD believes that the suggested revision is too
restrictive, as there are a variety of legal and equitable forms of
ownership interest. Furthermore, for purposes of determining whether
there is an identity of interest between ownership and the managing
agent, the commenter's suggested definition is inadequate. HUD
therefore declines to adopt the suggested change.
Comment: The definition of ``effective control'' is too broad and
should be clarified to mean actual or apparent legal authority to bind
the subject entity.
Response: HUD believes that effective control means much more than
the authority to bind, and includes various forms of influence over
others in the organization. Such influence is often based on financial
or family considerations. HUD has thus adopted a functional definition
of ``effective control.'' The suggested clarification would prevent HUD
from taking relevant factors into consideration when determining
whether an identity of interest relationship exists between an owner
and a management agent. Therefore, HUD declines to adopt the suggested
change.
Comment: HUD should amend ``agent employed to manage the property
that has an identity of interest'' so it is the same as for ``identity
of interest agent'' in Handbook 4381.5 REV-2, Chapter 1.
Response: The definition for identity of interest agent used in the
rule is statutory, and HUD does not believe it has the authority to
alter it. (See 12 U.S.C. 1735f-15-1(k), 42 U.S.C. 1437z-1(h).)
Comment: The rule should contain more precise cross-references to
new Section 29 of the U.S. Housing Act of 1937 and the corresponding
provisions of 24 CFR parts 26 and 30.
Response: The ``Authority'' statement at the beginning of the rule
and the discussion in the preamble provide appropriate cross-references
to the underlying statutory authority.
Comment: The definition of ``entity'' is too broad. In the case of
a public corporation, a low-level staff member such as a ``low ranking
Vice President'' can be the owner of a small number of shares in an
employee stock ownership plan, and could be included in the definition.
Similarly, the definition of ``entity'' in 30.45(a)(3) as ``any other
organization or group of people'' is overly broad. The same problem
occurs in section 30.68. The definition should be narrowed to limit the
scope of liability to those with actual responsibility for violations.
Response: Although the commenter seems to take the position that
one can become liable for civil penalties simply by meeting the
definition of ``entity,'' in fact the definition of ``entity'' does not
control who is potentially liable for civil penalties; rather, the only
potentially liable parties are those listed under 12 U.S.C. 1735f-
15(c)(1)(A) and 42 U.S.C. 1437z-1(b)(1). HUD does not believe, as the
commenter fears, that the relevant statutory sections and rule would
allow HUD to hold a person liable for a civil money penalty for the
sole reason that he or she is a ``low-level staff member'' of, or holds
a few shares in, the management agent. The proposed definition of
``entity'' properly takes account of the various legal and business
entities that can be involved in housing transactions.
Comment: Entities subject to fines in Secs. 30.45(b)(1) and (c)(1)
and 30.68(b) should include the officers or directors of a corporate
general partner in a partnership entity. This is necessary to prevent
bad landlords from avoiding liability by using complex corporate
structures to shield themselves.
Response: Applicable statutes do not give HUD authority to impose
civil money penalties directly against the parties mentioned in the
comment. 12 U.S.C. 1735f-15(c)(1)(A); 12 U.S.C. 1701q-1(b)(1) and
(c)(1); 42 U.S.C. 1437z-1(b)(1). Of course, ``any'' general partners,
including corporate ones, are covered under 12 U.S.C. 1735f-15(c)(1)(A)
and 42 U.S.C. 1437z-1(b)(1).
K. Effective Date
Comment: The rule should be effective retroactively. The effective
date should be amended to include past patterns of violation or
continuing violations that have not been corrected as of the date of
publication of the rule. This is essential to prevent bad landlords who
have escaped effective enforcement action for years from getting away
with impunity by claiming that only violations going forward from the
date of rule publication are subject to fines. HUD should be able to
take into account a previous administrative record of non-compliance
with HUD standards in assessing fines quickly and firmly after the date
of publication.(#8)
Response: HUD currently has the authority to impose civil money
penalties for violations listed in the original civil penalty statutes
which occurred after December 15, 1989, the effective date of those
statutes. Sections 108(b) and 109(b) of the Department of Housing and
Urban Development Reform Act of 1989, Public Law 101-235, 103 Stat.
2007, 2011. With respect to violations which were added by Section 561
of MAHRAA, HUD has statutory authority to impose civil money penalties
only for violations which take place after the effective date of the
final rule implementing section 561. (See Public Law 105-65 at section
561(c)(1). Section 562 has a similar provision. (See Public Law 105-65
at section 562(b).
Although HUD cannot make violators liable under the new laws for
conduct occurring prior to the effective date of final regulations, HUD
does consider a history of past violations in determining whether to
assess a civil penalty and how much. 24 CFR 30.80(b).
L. Section 811 and 202 Properties
Comment: Four commenters support the application of the rule to 811
and 202 properties.
Response: Since these comments seek no change in the proposed rule,
no response is necessary.
IV. Small Entities and HUD Enforcement Actions
The Small Business Regulatory Enforcement Fairness Act of 1996
(Pub. L. 104-121, 110 Stat. 847, approved March 29, 1996) (SBREFA)
provides, among other things, for agencies to establish specific
policies or programs to assist small entities. Small entities include
small businesses, nonprofit organizations, and small governmental
jurisdictions. On May 21, 1998 (63 FR 28214), HUD published a Federal
Register notice describing HUD's actions on implementation of SBREFA.
Section 223 of SBREFA requires agencies that regulate the
activities of small entities to establish a policy or program to reduce
or, under appropriate circumstances, waive civil penalties when a small
entity violates a statute or regulation. Where penalties are determined
appropriate, HUD's policy is to consider: (1) The nature of the
violation (the violation must not be one that is repeated or multiple,
willful, criminal or poses health or safety risks), (2) whether the
entity has shown a good faith effort to comply with the regulations;
and (3) the resources of the regulated entity.
With respect to the imposition of civil money penalties, HUD is
cognizant that section 222 of the SBREFA requires the Small Business
and Agriculture Regulatory Enforcement Ombudsman to ``work with each
agency with regulatory authority over small businesses to ensure that
small business concerns that receive or are subject to an audit, on-
site inspection, compliance assistance effort or other enforcement
related communication or contact by agency personnel are provided with
a means to comment on the enforcement activity conducted by this
personnel.'' To
[[Page 63441]]
implement this statutory provision, the Small Business Administration
has requested that agencies include the following language on agency
publications and notices which are provided to small businesses
concerns at the time the enforcement action is undertaken. The language
is as follows:
Your Comments Are Important
The Small Business and Agriculture Regulatory Enforcement
Ombudsman and 10 Regional Fairness Boards were established to
receive comments from small businesses about federal agency
enforcement actions. The Ombudsman will annually evaluate the
enforcement activities and rate each agency's responsiveness to
small business. If you wish to comment on the enforcement actions of
[insert agency name], call 1-888-REG-FAIR (1-888-734-3247).
As HUD stated in its May 21, 1998 Federal Register notice, HUD
intends to work with the Small Business Administration to provide small
entities with information on the Fairness Boards and National Ombudsman
program, at the time enforcement actions are taken, to ensure that
small entities have the full means to comment on the enforcement
activity conducted by HUD.
V. Findings and Certifications
Environmental Impact
In accordance with 40 CFR 1508.4 of the Council on Environmental
Quality regulations and 24 CFR 50.19(c)(1) and (c)(6) of the HUD
regulations, the policies and procedures contained in this final rule
are determined not to have the potential of having a significant impact
on the human environment and are therefore exempt from further
environmental review under the National Environmental Policy Act of
1969 (42 U.S.C. 4321).
Federalism Impact
This final 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 Executive Order
13132 (entitled ``Federalism'').
Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed and approved this final rule. In so doing,
the Secretary certifies that this final rule would not have a
significant economic impact on a substantial number of small entities.
This rule implements sections 561 and 562 of the Multifamily Reform
Act. The rule makes conforming changes to HUD's regulations at 24 CFR
part 30 to reflect statutory changes made to the National Housing Act
and the United States Housing Act of 1937. These changes were mandated
by the Multifamily Reform Act and are not discretionary on the part of
HUD.
The purpose of these amendments is to grant HUD additional
enforcement tools to use against those who violate agreements and
program requirements. The Multifamily Reform Act expanded the list of
persons and the types of violations subject to civil money penalties
under HUD's insured housing and Section 8 programs. To the extent that
these statutory changes impact small entities, it will be as a result
of actions taken by the small entities themselves--that is, by
violating multifamily and Section 8 program regulations and
requirements.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1531-1538) (UMRA) requires Federal agencies to assess the effects of
their regulatory actions on State, local, and tribal governments and on
the private sector. This final rule does not, within the meaning of the
UMRA, impose any Federal mandates on any State, local, or tribal
governments nor on the private sector.
Executive Order 12866, Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed this proposed
rule under Executive Order 12866 (entitled ``Regulatory Planning and
Review''). OMB determined that this proposed rule is a ``significant
regulatory action,'' as defined in section 3(f) of the Order (although
not economically significant, as provided in section 3(f)(1) of the
Order). Any changes made to the proposed rule subsequent to its
submission to OMB are identified in the docket file, which is available
for public inspection in the office of the Rules Docket Clerk, Room
10276, U.S. Department of Housing and Urban Development, 451 Seventh
Street, SW., Washington, DC, 20410-0500.
List of Subjects in 24 CFR Part 30
Administrative practice and procedure, Loan programs--housing and
community development, Mortgages, Penalties.
Accordingly, for the reasons stated in the preamble, HUD amends 24
CFR part 30 as follows:
PART 30--CIVIL MONEY PENALTIES: CERTAIN PROHIBITED CONDUCT
1. The authority citation for 24 CFR part 30 is revised to read as
follows:
Authority: 12 U.S.C. 1701q-1, 1703, 1723i, 1735f-14, and 1735f-
15; 15 U.S.C. 1717a; 28 U.S.C. 2461 note; 42 U.S.C. 1437z-1 and
3535(d).
2. Add paragraph (f) to Sec. 30.5 to read as follows:
Sec. 30.5 Effective dates.
* * * * *
(f) Under Sec. 30.68, a civil money penalty may be imposed for
violations, or for those parts of continuing violations, occurring on
or after January 7, 2002.
3. Revise Sec. 30.45 to read as follows:
Sec. 30.45 Multifamily and section 202 or 811 mortgagors.
(a) Definitions. The following definitions apply to this section
only:
(1) Agent employed to manage the property that has an identity of
interest and identity of interest agent. An entity:
(i) That has management responsibility for a project;
(ii) In which the ownership entity, including its general partner
or partners (if applicable) and its officers or directors (if
applicable), has an ownership interest; and
(iii) Over which the ownership entity exerts effective control.
(2) Effective control. The ability to direct, alter, supervise, or
otherwise influence the actions, policies, decisions, duties,
employment, or personnel of the management agent.
(3) Entity. An individual corporation; company; association;
partnership; authority; firm; society; trust; state, local government
or agency thereof; or any other organization or group of people.
(4) Multifamily property. Property that includes 5 or more living
units and that has a mortgage insured, co-insured, or held pursuant to
the National Housing Act (12 U.S.C. 1702 et seq.).
(5) Ownership interest. Any direct or indirect interest in the
stock, partnership interests, beneficial interests (for a trust) or
other medium of equity participation. An indirect interest includes
equity participation in any entity that holds a management interest
(e.g. general partner, managing member of an LLC, majority stockholder,
trustee) or minimum equity interest (e.g., a 25% or more limited
partner, 10% or more stockholder) in the ownership entity of the
management agent.
(6) Section 202 or 811 property. Property that includes 5 or more
living units and that has a mortgage held pursuant to a direct loan or
capital
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advances under section 202 of the Housing Act of 1959 (12 U.S.C. 1701q)
or capital advances under section 811 of the Cranston-Gonzalez National
Affordable Housing Act (42 U.S.C. 8013).
(b) Violation of agreement.--(1) General. The Assistant Secretary
for Housing-Federal Housing Commissioner, or his or her designee, may
initiate a civil money penalty action against a mortgagor of a section
202 or 811 property or a mortgagor, general partner of a partnership
mortgagor, or any officer or director of a corporate mortgagor of a
multifamily property who:
(i) Has agreed in writing, as a condition of a transfer of physical
assets, a flexible subsidy loan, a capital improvement loan, a
modification of the mortgage terms, or a workout agreement, to use
nonproject income to make cash contributions for payments due under the
note and mortgage, for payments to the reserve for replacements, to
restore the project to good physical condition, or to pay other project
liabilities; and
(ii) Knowingly and materially fails to comply with any of the
commitments listed in paragraph (b)(1)(i) of this section.
(2) Maximum penalty. The maximum penalty for each violation under
paragraph (b) of this section is the amount of loss that the Secretary
would experience at a foreclosure sale, or a sale after foreclosure, of
the property involved.
(c) Other violations. The Assistant Secretary for Housing-Federal
Housing Commissioner, or his or her designee, may initiate a civil
money penalty action against any of the following who knowingly and
materially take any of the actions listed in 12 U.S.C. 1735f-
15(c)(1)(B):
(1) Any mortgagor of a multifamily property;
(2) Any general partner of a partnership mortgagor of such
property;
(3) Any officer or director of a corporate mortgagor;
(4) Any agent employed to manage the property that has an identity
of interest with the mortgagor, with the general partner of a
partnership mortgagor, or with any officer or director of a corporate
mortgagor of such property; or
(5) Any member of a limited liability company that is the mortgagor
of such property or is the general partner of a limited partnership
mortgagor or is a partner of a general partnership mortgagor.
(d) Acceptable management. For purposes of this rule, ``management
acceptable to the Secretary'' under 12 U.S.C. 1735f-15(c)(1)(B)(xiv)
shall include:
(1) Proper fiscal management;
(2) Proper handling of vacancies and tenanting in accordance with
HUD regulations;
(3) Appropriate handling of rent collection;
(4) Proper maintenance;
(5) Compliance with HUD regulations on tenant organization; and
(6) Any other matters that pertain to proper management.
(e) Civil money penalty. A consistent pattern of violations of HUD
program requirements, or a single violation that causes serious injury
to the public or tenants, can be a basis for an action to assess a
civil money penalty.
(f) Section 202 or 811 projects. The Assistant Secretary for
Housing-Federal Housing Commissioner, or his or her designee, may
initiate a civil money penalty action against any mortgagor of a
section 202 or 811 property who knowingly and materially takes any of
the actions listed in 12 U.S.C. 1701q-1(c)(1).
(g) Maximum penalty. The maximum penalty for each violation under
paragraph (c) of this section is $30,000.
(h) Payment of penalty. No payment of a civil money penalty levied
under this section shall be payable out of project income.
(i) Exceptions. The Secretary may not impose penalties under this
section for a violation, if a material cause of the violation is the
failure of the Secretary, an agent of the Secretary, or a public
housing agency to comply with an existing agreement.
4. Add Sec. 30.68 to read as follows:
Sec. 30.68 Section 8 owners.
(a) Definitions. The following definitions apply to this section
only:
Agent employed to manage the property that has an identity of
interest and identity of interest agent. An entity:
(1) That has management responsibility for a project;
(2) In which the ownership entity, including its general partner or
partners (if applicable), has an ownership interest; and
(3) Over which the ownership entity exerts effective control.
Effective control. The ability to direct, alter, supervise, or
otherwise influence the actions, policies, decisions, duties,
employment, or personnel of the management agent.
Entity. An individual corporation; company; association;
partnership; authority; firm; society; trust; state, local government
or agency thereof; or any other organization or group of people.
Ownership interest. Any direct or indirect interest in the stock,
partnership interests, beneficial interests (for a trust) or other
medium of equity participation. An indirect interest includes equity
participation in any entity that holds a management interest (e.g.
general partner, managing member of an LLC, majority stockholder,
trustee) or minimum equity interest (e.g., a 25% or more limited
partner, 10% or more stockholder) in the ownership entity of the
management agent.
(b) General. The Assistant Secretary for Housing-Federal Housing
Commissioner, or his or her designee, and the Assistant Secretary for
Public and Indian Housing, or his or her designee, may initiate a civil
money penalty action against any owner, any general partner of a
partnership owner, or any agent employed to manage the property that
has an identity of interest with the owner or the general partner of a
partnership owner of a property receiving project-based assistance
under section 8 of the United States Housing Act of 1937 (42 U.S.C.
1437f) for a knowing and material breach of a housing assistance
payments contract, including the following:
(1) Failure to provide decent, safe, and sanitary housing pursuant
to section 8 of the United States Housing Act of 1937 and 24 CFR 5.703;
or
(2) Knowing or willful submission of false, fictitious, or
fraudulent statements or requests for housing assistance payments to
the Secretary or to any department or agency of the United States.
(c) Maximum penalty. The maximum penalty for each violation under
this section is $25,000.
(d) Payment of penalty. No payment of a civil money penalty levied
under this section shall be payable out of project income.
(e) Exceptions. The Secretary may not impose penalties under this
section for a violation, if a material cause of the violation is the
failure of the Secretary, an agent of the Secretary, or a public
housing agency to comply with an existing agreement.
4. Revise Sec. 30.80(k) introductory text, to read as follows:
Sec. 30.80 Factors in determining appropriateness and amount of civil
money penalty.
* * * * *
(k) In addition to the above factors, with respect to violations
under Secs. 30.45, 30.55, 30.60, and 30.68, the Assistant Secretary for
Housing-Federal Housing Commissioner, or his or her designee, or the
Assistant Secretary for Public and Indian Housing, or his or her
designee, shall also consider:
* * * * *
[[Page 63443]]
Dated: November 26, 2001.
Mel Martinez,
Secretary.
[FR Doc. 01-30033 Filed 12-5-01; 8:45 am]
BILLING CODE 4210-32-P