Revisions to the Hospital Mortgage Insurance Program

Note: EPA no longer updates this information, but it may be useful as a reference or resource.

[Federal Register: January 10, 2005 (Volume 70, Number 6)]
[Proposed Rules]
[Page 1749-1771]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10ja05-14]
[[Page 1750]]

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 200 and 242
[Docket No. FR-4927-P-01; HUD-2004-0011]
RIN 2502-AI22

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner.
ACTION: Proposed rule.

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SUMMARY: This proposed rule would revise the regulations governing the
Federal Housing Administration (FHA) mortgage insurance program for
hospitals. The rule would update and incorporate some earlier
provisions that currently are not published as part of the FHA
regulations. Further, the rule would add new provisions to make them
consistent with current industry practices. The rule also would codify
the relevant regulations that address hospital mortgage insurance in
one part, and therefore make the regulations more user-friendly.

DATES: Comment Due Date: March 11, 2005.

ADDRESSES: Interested persons are invited to submit comments regarding
this rule to the Regulations Division, Office of General Counsel, Room
10276, Department of Housing and Urban Development, 451 Seventh Street,
SW., Washington, DC 20410-0500. Interested persons may also submit
comments electronically through either:
? The Federal eRulemaking Portal at: http://www.regulations.gov;
or
? The HUD electronic Web site at: http://www.epa.gov/feddocket.
Follow the link entitled ``View Open HUD Dockets.''

Commenters should follow the instructions provided on that site to
submit comments electronically.
Facsimile (FAX) comments are not acceptable. In all cases,
communications must refer to the docket number and title. All comments
and communications submitted will be available, without revision, for
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the
above address. Copies are also available for inspection and downloading
at http://www.epa.gov/feddocket.

FOR FURTHER INFORMATION CONTACT: Christopher D. Boesen, Director,
Office of Insured Health Care Facilities, Department of Housing and
Urban Development, Room 9224, 451 Seventh Street, SW., Washington, DC
20410-8000; telephone (202) 708-0599 (this is not a toll-free number).
Hearing- and speech-impaired persons may access this number through TTY
by calling the Federal Information Relay Service at 800-877-8339 (this
is a toll-free number).

SUPPLEMENTARY INFORMATION:

I. Background

Section 242 of the National Housing Act (the Act), codified at 12
U.S.C. 1715z-7 (section 242), most recently amended in 2003 by the
Hospital Mortgage Insurance Act of 2003 (Pub. L. 108-91, approved
October 3, 2003) (HMI Act), authorizes HUD to insure mortgages on
hospitals in accordance with the terms of the section and upon such
conditions as HUD may prescribe. The purpose of the law is to ``assist
the provision of urgently needed hospitals for the care and treatment
of persons who are acutely ill or who otherwise require medical care
and related services of the kind customarily furnished only (or most
effectively) by hospitals.'' (See 12 U.S.C. 1715z-7(a).) Another aspect
of the statutory purpose is to encourage programs to provide
comprehensive health care, including outpatient and preventive care as
well as hospitalization. In the case of public hospitals, the statute
is designed to encourage programs to provide health care services to
all members of a community regardless of ability to pay. (See 12 U.S.C.
1715z-7(f).)
The statute defines the hospitals that are eligible for insurance
as those that: (a) Provide community service for inpatient medical care
of the sick or injured, including obstetrical care; (b) have not more
than 50 percent of their total patient days customarily assignable to
the specified categories of convalescent rest, drug and alcoholic,
epileptic, mentally deficient, nervous and mental health, and
tuberculosis, with the exception, introduced in the 2003 amendment, of
critical access hospitals; and (c) are a public facility, proprietary
facility, or facility of a private nonprofit corporation or
organization. The statute encourages programs that are undertaken to
provide essential health care services to all members of a community
regardless of ability to pay. (See 12 U.S.C. 1517z-7(f).) The 2003
exception to the 50 percent patient day requirement for critical access
hospitals lasts until 2006; HUD is to report to Congress no later than
July 31, 2006, on the effect of the exception for critical access
hospitals on section 242 hospital mortgage insurance and on the General
Insurance Fund. (See 12 U.S.C. 1715z-7(b).)
The statute authorizes mortgage insurance for new and rehabilitated
hospitals, including equipment. The insured mortgage may involve a
principal obligation of up to 90 percent of the estimated replacement
cost of the property or project, including equipment to be used in the
operation of the hospital when the proposed improvements are completed
and the equipment is installed and systems to conserve energy where the
Secretary determines that the systems will be cost-effective. The
Secretary may exercise regulatory control over the mortgagor's charges
and methods of financing, corporate entity, capital structure, and rate
of return. (See 12 U.S.C. 1715z(d)(1)-(2).)
The statute provides for HUD to take steps to ensure that a
hospital supported by HUD mortgage insurance is properly established
and responds to a real need. As to hospital operation, HUD must
require, before insuring, that satisfactory evidence be provided that
the hospital will be located in an area with reasonable minimum
standards of licensure and methods of operation of hospitals. HUD also
must require a satisfactory assurance that such standards will be
applied and enforced with respect to the hospital for which mortgage
insurance is being sought. (See 12 U.S.C. 1715z(d)(4)(A).)
As to need, the revised statute requires that HUD establish the
means for determining the need for, and feasibility of the hospital if
the State does not have an official procedure for making this
determination. If the State does have a procedure, HUD must require
that the procedure be followed and documented and that need has ``also
been established under this procedure.'' (See 12 U.S.C. 1715z-7(d)(4).)
HUD therefore contemplates that in cases where the State has a
procedure, both the State procedure and HUD's criteria for determining
need must be followed, which has been the historical practice. The need
documentation provision was changed in the 2003 revision made by the
HMI Act. Prior to that revision, the statute had provided that where
the State has no procedure for assessing need, the State commission
must conduct an independent study following certain procedures and
standards.
The statute also contains some technical provisions regarding
mortgage insurance. Section 242(d)(5) of the Act, 12 U.S.C. 1715z-
7(d)(5), places restrictions on mortgage insurance under part 242 on
mortgages that back Government National Mortgage Association (GNMA)
securities. The statute provides that in the case where

[[Page 1751]]

HUD requires a private nonprofit organization or public facility
mortgagor to provide cash money in excess of the amount of the
mortgage, the mortgagor shall be entitled to use a letter of credit
instead of cash. In such an event, mortgage proceeds may be advanced to
the mortgagor prior to any demand being made on the letter of credit.
(See 12 U.S.C. 1715z-7(d)(6).)
The statute also gives HUD authority to approve a partial release
of lien for any insured section 242 mortgage. Accordingly, if a
hospital wanted to dispose of some of its equipment or some surplus
property, for example, the lien as to those particular items could be
released under such terms and conditions as HUD may prescribe. (See 12
U.S.C. 1715z-7(e).)
The statute makes applicable certain provisions of section 207 of
the Act, 12 U.S.C. 1713, entitled ``Rental Housing Insurance.'' These
applicable provisions are the following sections: 1713(d) (Premium,
appraisal, and inspection charges); 1713(e) (Adjusted premium charges
on payment of a mortgage prior to the maturity date); 1713(g) (Payment
of insurance after default); 1713(h) (Certificate of claim and division
of excess proceeds); 1713(i) (Debentures); 1713(j) (Form and amounts of
debentures); 1713(k) (Acquisition of property by conveyance or
foreclosure); 1713(l) (Handling and disposal of property; settlement of
claims); and 1713(n) (Default and the rights of parties).
HUD's current regulations for hospital mortgage insurance
authorized by section 242, codified in 24 CFR part 242, are extremely
brief and rely mostly on cross-references to the general regulatory
provisions applicable to Federal Housing Administration (FHA) programs,
codified in 24 CFR part 200, and the multifamily housing mortgage
insurance regulations codified in 24 CFR part 207. The only statutory
provisions that are reflected in the current part 242 regulations are
the licensing provisions of 12 U.S.C. 1715z(d)(4)(A) (see 24 CFR 242.2)
and the provisions on eligible hospitals at 12 U.S.C. 1715z(d) (see 24
CFR 242.3).
The last detailed stand-alone regulation for part 242 insurance was
codified in the April 1, 1995, edition of the Code of Federal
Regulations (CFR). Where relevant, part II of this preamble entitled
``This Notice of Proposed Rulemaking'' will reference those prior
regulations.

II. This Notice of Proposed Rulemaking (NPRM).

Overall, this NPRM provides more detailed regulations for hospital
mortgage insurance than either the current streamlined 24 CFR part 242,
or the detailed section that existed prior to the 1996 edition of the
CFR. Experience has shown that certain sections of the 1995 regulations
are still pertinent to the program, while changes in the hospital
industry, including the increase in applicants for insurance and new
forms of ownership including mergers and physician participation,
require some changes. This regulation proposes new details, described
below, which respond to HUD's actual experience with hospital mortgage
insurance and to changes in the hospital industry, which have
dramatically increased every year.
The hospital mortgage insurance is a unique program (the section
242 program), unlike the multifamily housing programs in many respects.
It is believed to be more helpful to the public to include all the
necessary material in a single part, rather than relying heavily on
cross-references to the general provisions at 24 CFR part 200.
Therefore, this NPRM proposes to take a comprehensive approach.
There has been an overall increase in applications for insurance
and preapplication contacts. Often, these section 242 applicants are
new and inexperienced in this program, requiring greater guidance from
HUD for mortgagees and greater regulatory supervision of mortgagors.
This regulation provides this greater level of guidance. In addition,
this regulation provides for a preapplication procedure whereby issues
and problems can be addressed early in the process, or an application
that has deficiencies can be identified early in the process before an
applicant expends substantial resources on preparing it.

Changes to Part 200

This NPRM proposes to remove references to the hospital program
from 24 CFR part 200 so that users of the regulation can find
everything they need in one location and to avoid unnecessary
repetition. Specifically, 24 CFR 200.24 and 200.25 are revised to
remove references to 24 CFR part 242, and 24 CFR 200.40 is revised to
remove material concerning application and commitment fees that would
be contained entirely in 24 CFR part 242.

Proposed Part 242

Subpart A--General Eligibility Requirements
In accordance with the more detailed guidance being provided in
this regulation, this NPRM proposes to introduce an expanded section on
pertinent definitions in proposed 24 CFR 242.1. Among the more
significant definitions that would be added are definitions for
affiliate; hospital, which essentially tracks the statutory definition
in 12 U.S.C. 1715z-7(b)(1); personalty, which includes hospital
equipment and which in many cases will be covered by the insured
mortgage; preliminary review letter, a proposed new element to assist
in the application process; surplus cash; debt service coverage ratio;
and working capital. The definition section would also include
definitions of a variety of other commonly used terms related to
mortgage insurance.
The definition of ``hospital'' differs from the definition in the
1995 and earlier versions of the regulation primarily by adding the
exemption for critical access hospitals to the 50 percent-of-patient-
days cap on certain forms of care (chronic convalescent and rest, drug
and alcoholic, epilepsy, mentally deficient, mental and nervous, and
tuberculosis). This critical access hospital exemption was introduced
in 2003, and sunsets on July 31, 2006 (see HMI Act).
Proposed section 242.2 makes explicit that HUD has an obligation to
protect the soundness of the mortgage insurance fund. Therefore, this
NPRM proposes to require as an overall principle that HUD seek to avoid
defaults and claims for insurance and promote the program's financial
self-sufficiency and actuarial soundness.
Proposed section 242.3 is similar to 24 CFR 242.2 from the 1995
stand-alone regulation (24 CFR 242.2, April 1, 1995 edition) (1995
regulation), and reflects the overall purpose of the statute to
encourage comprehensive health care (see 12 U.S.C. 1715z-7(f)). This
NPRM proposes to add an additional sentence to emphasize the intent to
insure mortgages for public and certain nonpublic hospitals that serve
a public purpose by providing a substantial amount of care to those who
have no ability, or limited ability, to pay.
A number of sections in proposed subpart A establish basic
eligibility requirements. Sections 242.4, 242.5, 242.6, 242.7, and
242.10 relate, respectively, to eligible hospitals, eligible
mortgagees, property requirements, maximum mortgage amounts, and
eligible mortgagors. Similar material is contained in the 1995
regulation; this proposed rule would reorganize this material more
logically at the beginning of the rule. The maximum mortgage amount is
up to 90 percent of the estimated replacement cost, is statutory (see
12 U.S.C. 1715z-7(d)(2)), and has not changed since the 1995
regulation, where the analogous

[[Page 1752]]

section is 24 CFR 242.27. Eligible activities are the same as stated in
the 1995 regulation in 24 CFR 242.12, ``Eligible hospitals,'' and
include the new construction or substantial rehabilitation or
replacement of a hospital (see 12 U.S.C. 1715z-7(d)). The section on
``eligible mortgagees'' simply clarifies that the requirements in 24
CFR part 202 apply, and is similar to 24 CFR 242.25 from the 1995
regulation. The property requirements are the same as found in the 1995
regulation at 24 CFR 242.87 and provide assurance of long-term ownership.
Proposed 24 CFR 242.8, ``Standards for licensure and methods of
operation,'' implements 12 U.S.C. 1715z(d)(4)(A). The same material was
contained within a larger section dealing with certification
requirements in the 1995 regulation at 24 CFR 242.5.
Proposed 24 CFR 242.10, ``Eligible mortgagors,'' is similar to
242.23 of the 1995 regulations. The proposed rule would give greater
specificity to the types of for-profit mortgagors that would be
eligible, specifically excluding joint ventures, natural persons, and
general partnerships. These entities are specifically excluded because
of an increased exposure to liability caused by the continuity problems
which can arise with these specific entities. HUD needs assurance that
the hospital will remain in existence for the duration of the insured
mortgage loan and that the mortgagor will not be engaging in other
business activities that could affect the ability of the mortgagor to
make timely payment under the terms of the insured loan.
Proposed 24 CFR 242.9, ``Physician ownership,'' is a new provision
that is designed to recognize the reality of increased physician
participation in the ownership of hospitals, within certain limits.
Under current HUD Handbook guidelines, ``a proposal in which the
mortgagor is controlled in any manner by the professionals practicing
in the hospital will not be eligible.'' (Handbook 4615.1, ``Mortgage
Insurance for Hospitals,'' ]
1-4(b).) HUD has been administratively
waiving this prohibition under certain conditions. These are: a
determination that the proposed mortgagor will be at low risk for
violations of regulations of the Department of Health and Human
Services and other Federal and State regulations governing kickbacks;
self-referrals; and other issues that could increase the risk of
default. HUD proposes to codify this standard for approval of physician
ownership in the new regulation.
Proposed 242.11, ``Regulatory compliance required,'' would set an
eligibility criterion that hospitals be in substantial compliance with
government regulations. Hospitals under investigation would generally
not be eligible for the program, unless the Commissioner determines
that the investigation is minor in nature, that is, unlikely to result
in substantial liability or otherwise harm the creditworthiness of the
hospital.
Proposed 242.13, ``Parents and affiliates,'' recognizes the
increase in mergers, affiliations, and multi-provider systems in the
hospital industry. This section gives HUD express authority to take
actions to mitigate the insurance risks posed by these arrangements.
Proposed 242.14, ``Mortgage reserve fund,'' adapts the reserve
requirements to current industry conditions. The Section 242 program
long required that the mortgagor contribute to a depreciation reserve
fund, and in some cases, contribute additional reserve funds. The
depreciation reserve fund was designed for the era when insurers
reimbursed hospitals for their costs, including capital costs. The fund
was available in the later years of the mortgage to provide cash flow
to the hospital as depreciation and interest expense declined. Also,
the fund was available to help the hospital through unexpected cash
flow difficulties at any time during the mortgage term. With the shift
from cost reimbursement to reimbursement by case, the rationale for the
depreciation reserve fund is no longer valid. However, a reserve fund
is still needed to provide a cushion in times of financial difficulty
to help the hospital and the Commissioner avoid mortgage defaults.
Beginning in 2000, hospitals coming into the program were required to
maintain a Mortgage Reserve Fund (MRF) instead of a depreciation
reserve fund and hospitals with existing insured mortgage loans were
permitted to convert their depreciation reserve fund to an MRF if they
met certain conditions. The contribution requirements of the MRF are
lower than those for the depreciation reserve fund. The language in
Sec. 242.14 permits variation in fund requirements on a case-by-case
basis, especially for critical access hospitals and others that receive
partial cost-based reimbursement.
Finally, proposed 24 CFR 242.15 provides that some preexisting
long-term debt may be refinanced under the Section 242 program;
however, the ``hard costs'' of construction and equipment must
represent at least 20 percent of the total mortgage amount. The types
of loans that may be refinanced under this provision may or may not be
HUD-insured.
Subpart B--Application Procedures and Commitments
Proposed 24 CFR 242.16, ``Applications,'' includes new material
along with elements of the application procedures that have been in
place in the program. For example, the requirement that the approval
process entails a determination of market need in proposed Sec.
242.16(a) is statutory (12 U.S.C. 1715z-7(d)(4)(B)) and also was found
in the 1995 regulation in Sec. 242.3(a). Both proposed Sec. 242.16(c)
on the application fee and Sec. 242.16(d) on filing are unchanged from
Sec. Sec. 242.3(b) and 242.3(c) of the 1995 regulation.
The NPRM also proposes some important new elements in the
application procedure. In many cases, these are codifications of
procedures the Department is currently using.
The rule proposes, at 24 CFR 242.16(a)(1)(ii), a list of relevant
factors in determining market need. These factors include matters such
as the service area definition; current and projected future
population; the occupancy rates of the applicant and competing
hospitals; outpatient volume; and other factors related to assessing
the need for the hospital and the services it would provide in the
area. These factors are to be addressed, as applicable. This is in
addition to the State's procedure, if any, for determining market need.
In cases where the State has such a procedure, the State's procedure
must be followed prior to application submission (proposed 24 CFR
242.16(a)(1)(i)), and HUD's own determination of need must also be
made. Also, the rule clarifies that for start-up hospitals or major
expansions, it generally must be demonstrated that existing hospital
capacity or services are not adequate to meet the needs of the
population in the service area.
The NPRM would also change long-standing policy for operating
margin and financial feasibility. These standards are necessary to
protect the soundness of the insurance fund. Proposed Sec.
242.16(a)(2) would require a positive three-year aggregate operating
margin, with discretion for HUD to find eligibility on the basis of a
financial turnaround in the most recent year, and a debt service
coverage ratio of 1.25 in the three most recent audited years, unless
the Commissioner finds a financial turnaround, based on the audited
financial data, resulting in a debt service coverage ratio of at least
1.40 in the most recent year. Proposed Sec. 242.16(a)(3) contains
detailed factors for determining whether the project is financially
feasible; that is, whether it will be able to meet its debt service

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obligations over the life of the mortgage that is proposed to be
insured. Among the factors included are a current debt service coverage
ratio of 1.25 or higher and a projected debt service coverage ratio of
1.40 or higher, and a balance sheet that shows the resources to
withstand a short period of net operating losses without jeopardizing
financial viability.
Because of the overall increase in applications for the Section 242
program, and an increase in the number of new applicants, the rule
would codify in Sec. 242.16(a)(4) the preliminary review process that
HUD has used in recent years. This process is designed to forestall
problems and provide guidance to applicants early in the process. The
preliminary review is performed at the request of a hospital, a
hospital's financial consultant, or a HUD-approved lender for the
purpose of identifying any factor that would likely cause an
application to be rejected before the applicant spends substantial
resources on the application. The applicant submits a preliminary
information package to the Commissioner, and, on that basis, the rule
proposes that the Commissioner would issue a preliminary review letter
stating either that the application would likely result in a rejection,
or that there appears to be no bar to proceeding to the next step in
the application process. The rule specifies that this latter
determination is not to be construed to imply that the application will
necessarily be approved.
If a finding is made of probable rejection, the applicant may not
seek another preliminary review for one year from the date of
notification, unless the Commissioner grants an exception based on a
determination that the circumstances which led to the conclusion of a
likely rejection have changed. If a finding is made that the
application may go forward, the complete application should be
submitted within one year from the date of notification, or a new
preliminary review may be required.
Section 242.16(a)(5) provides that the next step in the application
process is a preapplication meeting between the applicant and HUD. The
result of this meeting will be either a determination that there is no
bar to further process, or that there are issues that must be resolved
before an application should be submitted.
The remainder of Sec. 242.16 contains administrative components of
application processing. Section 242.16(b) specifies the application
contents. Section 242.16(e) provides that only technically complete
applications will be processed and that the Commissioner, upon
determination that an application is complete, issue a Completeness
Letter to the applicant stating that the application is complete.
Completeness letters generally are endeavored to be issued three weeks
from the date that the application is determined to be complete.
Section 242.16(f), ``Application review,'' gives the Commissioner broad
discretion to consider any relevant factors in determining whether to
grant an application, to solicit the advice of experts within and
outside of government, and to request additional information from the
applicant. At a minimum, HUD will consider eligibility, market need,
financial feasibility, and compliance with applicable regulations.
Section 242.16(f) also states that the Commissioner will render a
decision within 12 months of the date of the completeness letter,
unless the Commissioner for good cause extends the period of review.
The review period could also be shorter than 12 months, depending
generally on when the necessary information and materials are received
and on the completeness of the materials.
The remainder of subpart B concerns commitments to insure the
mortgage. Much of this portion of the regulation--including inspection
fees (proposed Sec. 242.18); fees in increases in commitments prior to
endorsement (Sec. 242.19(a)) and increases between initial and final
endorsement (Sec. 242.19(b)); reopening of expired commitments (Sec.
242.20); refund of fees (Sec. 242.21); adjusted and reduced mortgage
amounts (Sec. 242.23(a) and (b))--are similar to the analogous
sections in the 1995 regulations. In other cases, technical changes are
proposed. For example, where the 1995 regulations provide that
insurance on advances may be made, this proposed rule would require
such insurance on advances and specifies that they reflect the mortgage
amount, interest rate, mortgage term, date of commencement of
amortization, and other requirements (proposed Sec. 242.17(a)). The
proposed regulation would also change the term of the commitment from
180 days stated in the 1995 regulation to 90 days, subject to
extensions not to exceed 180 days (proposed Sec. 242.17(c)).
There are also proposed changes from the 1995 provisions to the
lender's maximum fees and charges (proposed Sec. 242.22) to include a
3\1/2\ percent permanent financing fee, and technical changes to
regulations dealing with the Commissioner's discretion to evaluate the
amount of cash equity that any mortgagor must supply, as well as
discretion as to whether a nonprofit or public entity mortgagor may use
a letter of credit in lieu of cash. (See proposed Sec. 242.23(c).) The
latter section requires that the loan-to-value ratio not exceed 90
percent, although it may be less than 90 percent. In no case may the
equity contribution be proceeds from a loan. Finally, proposed Sec.
242.24 would give the Commissioner discretion to evaluate, on a case-
by-case basis, the amount of working capital that must be available to
the new hospital at the commencement of operations. Minimum working
capital is required to ensure that hospitals, especially new hospitals,
have sufficient operating cash on hand pending the receipt of income
from operations. Generally, the working capital shall not be borrowed
funds, unless the Commissioner determines that there are offsetting
financial strengths to compensate for the risks associated with borrowing.
Subpart C--Mortgage Requirements
Many of the requirements in this subpart are adopted without change
from the 1995 regulations, and have been ongoing features of the
program. This section of the preamble focuses on new or changed
requirements proposed to be introduced in this NPRM. The following
table shows the substantially equivalent sections:

Substantially Equivalent Sections
------------------------------------------------------------------------
1995 Regulation Proposed rule
------------------------------------------------------------------------
242.31(a)................................ 242.25(a)(1)
242.31(b)................................ 242.25(b)
242.33(a)................................ 242.26(a)
242.33(b)................................ 242.26(b)
242.35................................... 242.27
242.37................................... 242.29
242.39................................... 242.30
242.41(a)................................ 242.31(a)
242.41(b)................................ 242.31(b)
242.51(b)................................ 242.37(b)
242.51(b)(1)............................. 242.37(b)(1)
242.51(b)(2)............................. 242.37(b)(2)
------------------------------------------------------------------------

Proposed Sec. 242.32 is a covenant against liens other than the
insured mortgage, with an exception for other liens that the
Commissioner may approve. This section codifies a policy that has been
part of the standard regulatory agreement. In HUD mortgage insurance
programs generally, the insured loan must have priority over other
liens. Permitting the Commissioner to approve additional secondary
liens for hospitals may enable hospitals to benefit from programs
offered by the Department of Health and Human Services and States.
The mortgage lien certifications proposed in Sec. 242.35 would add
a new element to the 1995 equivalent section, 24 CFR 242.49, that is, a
certification

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that the security agreement and Uniform Commercial Code (UCC) financing
statements establish a first lien on the personalty of the mortgagor.
``Personalty'' would be defined in this regulation as well.
The 1995 regulations generally grant a prepayment privilege except
in the case of mortgage loans that have been funded by the issuance and
sale of bonds or bond anticipation notes (24 CFR 242.51(a) and (c)), in
which case the mortgage may contain a prepayment restriction. Proposed
Sec. 242.37(a), however, would allow the Commissioner to establish
additional exceptions to the prepayment privilege. Proposed Sec.
242.37(c) would allow for prepayment restrictions in the case of bond
funding as in the 1995 regulation, as well as where the mortgage
secures GNMA mortgage-backed securities, in those cases where the
statute allows such mortgages to be insured under this part (see
Section 242(d)(5) of the Act, 12 U.S.C. l715z-7(d)(5) for the
restrictions on insuring mortgages that are used to collateralize GNMA
securities). Proposed Sec. 242.37(d) would provide that in the event
of a default, the Commissioner could override any prepayment penalty in
order to facilitate a refinancing of the property to avoid a claim on
the insurance fund.
There is a change from the 1995 regulations in the area of late
charges. Where the 1995 regulation imposed a limitation on the amount
of late charges, the proposed rule would be flexible in this area,
allowing the Commissioner to establish the terms and conditions for
late charges. (Compare 24 CFR 242.52 of the 1995 regulation with
proposed Sec. 242.38.) This aligns the current rule with HUD's
regulations in other insurance programs on this subject, as codified in
24 CFR 200.88.
Subpart D--Endorsement for Insurance
The proposed sections on endorsement for insurance essentially
track similar requirements in 24 CFR part 200. This proposed rule would
add to those typical insurance provisions specific requirements as to
the application of cost savings in proposed Sec. Sec. 242.41(b) and
242.43. These requirements for the application of cost savings codify
current program practice.
Subpart E--Construction
Proposed Sec. Sec. 242.44 through 242.53 would establish
construction standards for the hospital mortgage insurance program.
Proposed Sec. 242.44 would codify as the minimum standard the
Guidelines for Construction and Equipment of Hospital and Medical
Facilities published by the American Institute of Architects, which is
the standard currently being used in the program.
Proposed Sec. 242.45 would codify the practice of approving, for
good cause shown and with the concurrence of the Commissioner, early
commencement of work; that is, commencement of certain preliminary work
before the commitment to insure the mortgage. In such cases, the
inspection fee must be prepaid before the commencement of the early
work. Section 242.45 also makes clear the fact that no preliminary site
work may be started prior to HUD doing an environmental review under 24
CFR part 50 and indicating its approval of the proposed work.
Proposed Sec. 242.46, ``Insured advances--building loan
agreement,'' and 242.47, ``Insured advances for building components
stored off-site,'' would simply recodify similar sections of the 1995
regulations. (See Sec. Sec. 242.53 and 242.54 of the 1995
regulations.) Proposed Sec. 242.46 would provide for progress payments
during construction. Proposed Sec. 242.47 would allow for insured
advances for building components stored off-site if certain
requirements are met. On-site storage must be impractical because of
size or weight or the threat of weather damage or other adverse
conditions at the site. This section also contains certain storage and
labeling requirements, and places responsibility for storage,
transportation, and insurance of the components on the general contractor.
Proposed Sec. 242.48 would provide for insurance of ``long lead
items,'' that is, items for which an interim payment is needed in order
to insure the timely production and delivery to the project site of the
item. This provision for such items is a codification of existing
program practice.
Proposed Sec. 242.49 would provide that the Commissioner may
require the mortgagor to make a deposit of cash or securities. The
Commissioner may also permit the use of a letter of credit instead of
cash or securities. This provision would be similar to 24 CFR 242.55 of
the 1995 regulation, the primary difference being that if a letter of
credit is used, it must be issued by an institution with a Standard &
Poor's rating of AA or equivalent.
Proposed Sec. 242.50, ``Funds and finances--off-site utilities and
streets'' would recodify 24 CFR 242.59 of the 1995 regulations. This
section requires assurance of completion of off-site public utilities
and streets except in cases where a municipality or other local
governmental body agrees to install streets and utilities without cost
to the mortgagor.
Proposed Sec. 242.51 provides for assurances of completion in the
form of surety bonds, and would abbreviate 24 CFR 242.61 of the 1995
regulation to remove references to Hill-Burton grants and costs of less
than $500,000. It is HUD's experience that these elements are not
needed for hospitals now applying for loans. The section also provides
that its requirements are a minimum, and that the mortgagee may require
more stringent sureties of completion. Proposed Sec. 242.52,
``Construction contracts,'' would require the mortgagor to enter into a
construction contract with a builder selected by competitive bidding
procedures. Proposed Sec. 242.52(b) would allow for such a contract to
take a variety of forms, including a lump sum contract; a construction
management contract with a guaranteed maximum price, the final costs of
which are subject to a certification acceptable to the Commissioner; a
design-build contract; or such other contract as the Commissioner may
approve. This section would differ from a similar section of the 1995
regulation by not providing for a waiver of competitive bidding, and by
expanding the types of contracts that may be used (formerly, only a
lump sum contract was allowed). By doing so, the rule would allow for a
wider variety of participants who may wish to use a variety of
contracting methods.
Proposed Sec. 242.53 would require that contracts relating to
construction of the project not be made with any firm that has been
found to be ineligible to participate by HUD or the Department of
Labor. These restrictions on ineligible contractors are similar to
those found in 24 CFR 242.71 of the 1995 regulation, with an additional
provision prohibiting identity of interest contracts, as determined by
the Commissioner, between the applicant and the general contractor.
Subpart F--Nondiscrimination and Wage Rates
Proposed Sec. Sec. 242.54 and 242.55 would reference the basic
nondiscrimination and Davis-Bacon wage rate requirements applicable to
this program as well as the special requirement for payment of overtime
to laborers and mechanics that applies to this program under section
212 of the Act.
Subpart G--Regulatory Agreement, Accounting and Reporting, and
Financial Requirements
Proposed Sec. Sec. 242.56-242.93 would primarily focus on improved
HUD supervision of the insured mortgagor, as well as on administrative
provisions

[[Page 1755]]

necessary to run the program. Overall, HUD will exercise financial
supervision over its insured mortgagors to minimize the risk to the
insurance fund.
Proposed Sec. 242.56 would provide for regulation by a Regulatory
Agreement which can be flexible and include such clauses as the
Commissioner deems necessary on a case-by-case basis. This section also
makes clear that the mortgagor will be subject to continuing
supervision by government agencies and their contractors and agents for
the life of the insured loan. The purpose of this provision is to
ensure financial soundness and prevent program abuse.
Proposed Sec. Sec. 242.57 and 242.59 would restate, respectively,
24 CFR 242.77 and 242.81 from the 1995 regulation. These sections
require the mortgagor to maintain the property in good repair and allow
for HUD to inspect the property, and the mortgagor's books and records,
at reasonable times. In addition to these provisions, proposed Sec.
242.58, ``Books, accounts, and financial statements,'' expands on the
parallel 1995 regulation, 24 CFR 242.79, by specifying details of
financial reports and when these reports must be filed with the
Commissioner. This section also expands on the auditing requirements of
the 1995 regulation. The purpose of these changes is to improve on the
financial oversight of the mortgagor and reduce risk to the insurance fund.
Proposed Sec. 242.61, ``Management,'' would provide that the
Commissioner must approve any management contract for the hospital
insured under this section. Furthermore, HUD could require that the
principals of the mortgagor and key management employees could be
removed, substituted, or terminated for cause by written request of the
Commissioner. Experience has shown that there is a need to ensure
appropriate management of hospitals insured under this program.
Under proposed Sec. 262.64, all current and future property and
equipment will become subject to the HUD-insured mortgage unless the
Commissioner, for cause, approves otherwise. Given the importance of
the security for the insured loan, proposed Sec. 242.62, ``Release of
lien,'' and Sec. 242.65, ``Distribution of assets,'' would contain
important concepts. Under Sec. 242.62, the mortgagor would not be able
to dispose of any non-cash assets secured by the mortgage without the
approval of the mortgage lender and the Commissioner. If such disposal
of assets involves a partial release of the lien, the lender, subject
to review by the Commissioner, must make a determination that the
remaining lien is sufficient to cover the remaining property.
Proposed Sec. 242.65 would provide for the distribution of assets,
including surplus cash. Cash, to be considered surplus and available
for distribution, must either meet the terms of the definition of
``surplus cash'' in proposed 24 CFR 242.1 or be approved for
distribution by the Commissioner. This section clarifies to whom
distributions may occur.
Two proposed sections would regulate affiliate transactions.
Proposed Sec. 242.66 would prohibit transactions with affiliates
except with prior written approval of the Commissioner. Proposed Sec.
242.67 would prohibit acquisition, development, organization, or
acquisition of a significant interest in any corporation, subsidiary,
or affiliate other than those with which the mortgagor was affiliated
with as of the date of application, without the prior written approval
of the Commissioner.
Subpart H--Miscellaneous Requirements
This subpart contains a number of requirements that do not fit
under other categories of 24 CFR part 242. For example, Sec. 242.68
refers to disclosure and verification of Social Security and Employer
Identification numbers. Section 242.69 relates to fees for transfers of
physical assets.
Although the program has generally prohibited the leasing of an
entire hospital, proposed Sec. 242.72 would permit leasing of the
hospital in two limited instances. One is where there is a State law
prohibition against State entity mortgaging of health care facilities.
Another is where the Commissioner determines that leasing is necessary
to reduce the risk of default by a financially troubled hospital with
an existing loan under 24 CFR part 242.
Proposed Sec. 242.73 provides for the waiver of eligibility
requirements for insurance under the part of a mortgage assigned to the
Secretary or acquired by the Secretary subsequent to a payment of
claim. This provision would help to enable the Secretary to dispose of
such mortgages after such assignment or acquisition, thereby recouping
losses to the insurance fund.
Proposed Sec. Sec. 242.74 (smoke detectors), 242.75 (title
requirements), and 242.76 (title evidence) would restate, without
substantive change, 1995 Sec. Sec. 242.87, 242.89, and 242.91,
respectively. Proposed Sec. 242.77 would provide that the hospital
must be free and clear of all liens other than the insured mortgage,
except for certain categories of liens as the Commissioner may provide.
Proposed Sec. 242.89, ``Supplemental loans,'' would provide for a
loan or advance of credit for financing improvements or additions to a
hospital covered by this part. This section implements section 241 of
the Act (12 U.S.C. 1715z-6), for the hospital mortgage insurance program.
Proposed Sec. 242.90, ``Eligibility of mortgages covering
hospitals in certain neighborhoods,'' restates 24 CFR 242.94 from the
1995 regulation. The purpose of this section is to provide for hospital
care in older or declining neighborhoods, subject to certain
conditions, such as ensuring that the area is reasonably viable and the
mortgage is an acceptable risk.
Proposed Sec. 242.91, ``Eligibility of refinancing transactions,''
restates 24 CFR 242.96 from the 1995 regulations. Proposed Sec. Sec.
242.92 (minimum principal loan amount), 242.93 (amendment of
regulations), and 242.94 (cross reference) restate 24 CFR 242.97,
242.249, and 242.251 of the 1995 regulations, respectively.

Findings and Certifications

Information Collection Requirements
The information collection requirements contained in this proposed
rule are found in Sec. Sec. 242.8, 242.13, 242.16, 242.20, 242.25,
242.33, 242.35, 242.40, 242.41, 242.42, 242.46, 242.52, 242.57, 242.58,
242.61, 242.68, and 242.76. As discussed in the preamble of this rule,
the information collection requirements in these sections are largely
unchanged from those already in place for the Section 242 program, and
found in the existing regulations in 24 CFR parts 200, 207 and 242, and
documents such as form, HUD-92013-HOSP (Application for Hospital
Project Mortgagee Insurance) and Mortgagee Letter 04-08 (issued
February 23, 2004), which details the requirements for the market need
study and financial feasibility study. The existing information
collection requirements were approved by the Office of Management and
Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-
3520), and assigned OMB approval number 2502-0518.
The existing information collections, which remain unchanged by
this proposed rule, are found in the following sections: Sec. Sec.
242.8 (requiring evidence that the hospital is located in a State or a
political subdivision of a State with reasonable minimum standards for
licensure and methods of operation), 242.13 (concerning financial and
operational information about parents and affiliates), 242.20
(concerning request for reopening

[[Page 1756]]

expired commitment), 242.25 (form of the mortgage), 242.33 (maintenance
of adequate malpractice liability, fire, and extended coverage
insurance on the property), 242.40 (form of mortgagee certificate),
242.41 (concerning agreement precluding excess of mortgage proceeds
over statutory limitations), 242.42 (mortgagor's certificate of actual
cost), 242.46 (building loan agreement), 242.50 (assurances of
completion of off-site public utilities and streets), 242,51 (assurance
of completion of construction or rehabilitation where cost is more than
$500,000), 242.52 (a contract for construction or rehabilitation of a
hospital), 242.56 (execution of regulatory agreement), and 242.75
(marketable title requirements), and 242.76 (evidence of title).
The Department has estimated the total burden for the information
collection currently in place for the Section 242 program, which
includes the Application for Hospital Project Mortgage Insurance (HUD-
92013-HOSP), the market need and feasibility studies, and the
requirements set forth in the regulations, as a total of 17,280 hours.
This total is based on an estimate of 18 applicants a year and 960
hours per response.
The additional information collection set forth in this proposed
rule can be found in the following regulatory sections. Several of
these sections, such as 242.16 (the application requirements) contain
the existing requirements, and these requirements have been expanded
upon by the proposed rule, particularly with respect to the market need
and feasibility study. In Sec. 242.16(a)(1)(ii), HUD proposes a list
of additional relevant factors in determining market need, and Sec.
242.16(a)(3) contains detailed factors for determining whether a
project is financially feasible. Section 242.35 proposed to add to the
existing mortgage lien certification a certification that the security
agreement and UCC financing statements establish a first line on the
personalty of the mortgagor. Section 242.58 expands upon the
recordkeeping requirements currently in place. Section 242.61 provides
for a management contract for the hospital and Sec. 242.68 requires a
disclosure and verification of Social Security and employer
identification numbers. The additional burden of the information
collections in this proposed rule is estimated as follows:

Reporting and Recordkeeping Burden
----------------------------------------------------------------------------------------------------------------
Estimated
Number of average time Estimated
Section reference Number of responses per for additional
parties respondent requirement annual burden
(in hours) (in hours)
----------------------------------------------------------------------------------------------------------------
Sec. 242.16................................... 18 1 5 90
Sec. 242.35................................... 18 1 2 36
Sec. 242.58................................... 18 1 1 18
Sec. 242.61................................... 18 1 3 54
Sec. 242.68................................... 18 1 1 18
-----------------
Total Additional Annual Burden Presented by .............. .............. .............. 216
Proposed Rule..............................
Total Estimated Annual Burden: 17, 280 hrs + .............. .............. .............. 17,416
216 hrs....................................
----------------------------------------------------------------------------------------------------------------

The changed collection of information is being submitted to OMB for
review and approval. 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.
Interested persons are invited to submit comments regarding the
information collection requirements in this rule no later than February
9, 2005. This time frame does not affect the deadline for comments to
the agency on the rule, however. Comments on information collection
2502-0518 must refer to the proposed rule by name and docket number
(FR-4927-P-01) and must be sent to:

Mark D. Menchik, HUD Desk Officer, Office of Management and Budget, New
Executive Office Building, Washington, DC 20503, Fax number: (202) 395-
6947, E-mail: Mark_D._Menchik@omb.eop.gov;
and
Kathleen McDermott, Reports Liaison Officer, Office of Housing-Federal
Housing Commissioner, Department of Housing and Urban Development, 451
Seventh Street, SW., Room 9116, Washington, DC 20410-8000.

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.
Environmental Impact
A Finding of No Significant Impact with respect to the environment
for this rule has been made in accordance with HUD regulations at 24
CFR part 50, which implement section 102(2)(C) of the National
Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). The Finding of
No Significant Impact is available for public inspection between 8 a.m.
and 5 p.m. weekdays in the Regulations Division, Office of the General
Counsel, Department of Housing and Urban Development, Room 10276, 451
Seventh Street, SW., Washington, DC 20410-5000.
Unfunded Mandates Reform Act
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 on the private sector. This rule does not impose a
Federal mandate on any State, local, or tribal government, or on the
private sector, within the meaning of UMRA.

[[Page 1757]]

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.
There are no anti-competitive discriminatory aspects of the rule
with regard to small entities, and there are not any unusual procedures
that would need to be complied with by small entities. The rule revises
the regulations under the mortgage insurance program for hospitals to
update and improve the efficiency of the program.
Therefore, the undersigned certifies that this proposed rule will
not have a significant economic impact on a substantial number of small
entities, and an initial regulatory flexibility analysis is not required.
Notwithstanding the determination that this rule would not have a
significant economic impact on a substantial number of small entities,
HUD specifically invites comments regarding 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 an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial direct compliance costs on State and local
governments and is not required by statute, or the rule preempts State
law, unless the agency meets the consultation and funding requirements
of section 6 of the Executive Order. This rule does not have federalism
implications and does not impose substantial direct compliance costs on
State and local governments nor preempt State law within the meaning of
the Executive Order.
Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed this rule under
Executive Order 12866, Regulatory Planning and Review. OMB determined
that this rule is a ``significant regulatory action'' as defined in
section 3(f) of the order (although not an economically significant
regulatory action under the order). Any changes made to this rule as a
result of that review are identified in the docket file, which is
available for public inspection in the Regulations Division, Office of
the General Counsel, Room 10276, 451 Seventh Street, SW., Washington,
DC 20410-0500.

List of Subjects in 24 CFR Part 200

Administrative practice and procedure, Claims, Equal employment
opportunity, Fair housing, Home improvement, Housing standards, Lead
poisoning, Loan programs--housing and community development, Mortgage
insurance, Organization and functions (Government agencies), Penalties,
Reporting and recordkeeping requirements, Social security, Unemployment
compensation, Wages.

Catalog of Federal Domestic Assistance

The Catalog of Federal Domestic Assistance number is 14.128.

List of Subjects in 24 CFR Part 242

Hospitals, Mortgage insurance, Reporting and record keeping
requirements.

Accordingly, for the reasons described in the preamble, HUD
proposes to amend 24 CFR parts 200 and 242 to read as follows:

PART 200--INTRODUCTION TO FHA PROGRAMS

1. Section 200.24 is revised to read as follows:

Sec. 200.24 Existing projects.

A mortgage financing the purchase or refinance of an existing
rental housing project under section 207 of the Act, or for refinancing
the existing debt of an existing nursing home, intermediate care
facility, assisted living facility, or board and care home, or any
combination thereof, under section 232 of the Act, may be insured
pursuant to provisions of section 223(f) of the Act and such terms and
conditions established by the Commissioner.
2. Section 200.25 is revised to read as follows:

Sec. 200.25 Supplemental loans.

A loan, advance of credit or purchase of an obligation representing
a loan or advance of credit made for the purpose of financing
improvements or additions to a project covered by a mortgage insured
under any section of the Act or Commissioner-held mortgage, or
equipment for a nursing home, intermediate care facility, board and
care home, assisted living facility, or group practices facility, may
be insured pursuant to the provisions of section 241 of the Act and
such terms and conditions established by the Commissioner.
3. 24 CFR 200.40 is amended by revising paragraphs (c), (d), and
(f) to read as follows:

Sec. 200.40 HUD fees.

The following fees apply to mortgages to be insured under this part.
* * * * *
(c) Application fee--conditional commitment. For a mortgage being
insured under section 223(f) of the Act (12 U.S.C. 1715n), an
application-commitment fee of $3 per thousand dollars of the requested
mortgage amount shall accompany an application for conditional
commitment.
(d) Application fee--firm commitment: General. An application for
firm commitment shall be accompanied by an application-commitment fee
which, when added to any prior fees received in connection with
applications for a SAMA letter or a feasibility letter, will aggregate
$5 per thousand dollars of the requested mortgage amount to be insured.
The payment of an application-commitment fee shall not be required in
connection with an insured mortgage involving the sale by the
government of housing or property acquired, held, or contracted
pursuant to the Atomic Energy Community Act of 1955 (42 U.S.C. 2301 et
seq.).
* * * * *
(f) Fees on increases--in general. This section applies to all
applications except applications involving hospitals, which are covered
in 24 CFR part 242.
(1) Increase in firm commitment before endorsement. An application,
filed before initial endorsement (or before endorsement in a case
involving insurance upon completion), for an increase in the amount of
an outstanding firm commitment shall be accompanied by a combined
additional application and commitment fee. This combined additional fee
shall be in an amount which will aggregate $5 per thousand dollars of
the amount of the requested increase. If an inspection fee was required
in the original commitment, an additional inspection fee shall be paid
in an amount computed at the same dollar rate per thousand dollars of
the amount of increase in commitment as was used for the inspection fee
required in the original commitment. When insurance of advances is
involved, the additional inspection fee shall be paid at the time of
initial endorsement. When insurance upon completion is involved, the
additional inspection fee shall be paid before the date construction is
begun or if construction has begun, it shall be paid with the
application for increase.
(2) Increase in mortgage between initial and final endorsement.
Upon an application, filed between initial and final endorsement, for
an increase in the

[[Page 1758]]

amount of the mortgage, either by amendment or by substitution of a new
mortgage, a combined additional application and commitment fee shall
accompany the application. This combined additional fee shall be in an
amount which will aggregate $5 per thousand dollars of the amount of
the increase requested. If an inspection fee was required in the
original commitment, an additional inspection fee shall accompany the
application in an amount not to exceed the $5 per thousand dollars of
the amount of the increase requested.
(3) Loan to cover operating losses. In connection with a loan to
cover operating losses (see Sec. 200.22), a combined application and
commitment fee of $5 per thousand dollars of the amount of the loan
applied for shall be submitted with the application for a firm
commitment. No inspection fee shall be required.
* * * * *

PART 242--MORTGAGE INSURANCE FOR HOSPITALS

4. Part 242 is revised to read as follows:

PART 242--MORTGAGE INSURANCE FOR HOSPITALS

Subpart A--General Eligibility Requirements
Sec.
242.1 Definitions.
242.2 Program financial self-sufficiency.
242.3 Encouragement of certain programs.
242.4 Eligible hospitals.
242.5 Eligible mortgagees.
242.6 Property requirements.
242.7 Maximum mortgage amounts.
242.8 Standards for licensure and methods of operation.
242.9 Physician ownership.
242.10 Eligible mortgagors.
242.11 Regulatory compliance required.
242.13 Parents and affiliates.
242.14 Mortgage reserve fund.
242.15 Limitation on refinancing of existing indebtedness.
Subpart B--Application Procedures and Commitments
242.16 Applications.
242.17 Commitments.
242.18 Inspection fee.
242.19 Fees on increases.
242.20 Reopening of expired commitments.
242.21 Refund of fees.
242.22 Maximum fees and charges by mortgagee.
242.23 Adjusted and reduced mortgage amounts.
242.24 Working capital.
Subpart C--Mortgagee Requirements
242.25 Mortgage form and disbursement of mortgage proceeds.
242.26 Agreed interest rate.
242.27 Maturity.
242.28 Alllowable costs for consultants.
242.29 Payment requirements.
242.30 Application of payments.
242.31 Accumulation of accruals.
242.32 Covenant against liens.
242.33 Covenant for malpractice, fire and other hazard insurance.
242.35 Mortgage lien certifications.
242.37 Mortgage prepayment.
242.38 Late charge.
Subpart D--Endorsement for Insurance
242.39 Insurance endorsement.
242.40 Mortgagee Certificate.
242.41 Certification of cost requirements.
242.42 Certificates of actual cost.
242.43 Application of cost savings.
Subpart E--Construction
242.44 Construction standards.
242.45 Early commencement of work.
242.46 Insured advances--building loan agreement.
242.47 Insured advances for building components stored off-site.
242.48 Insured advances for certain equipment and long lead items.
242.49 Funds and finances: Deposits and letters of credit.
242.50 Funds and finances: Off-site utilities and streets.
242.51 Funds and finances: Insured advances and assurance of
completion.
242.52 Construction contracts.
242.53 Ineligible contractors.
Subpart F--Nondiscrimination and Wage Rates
242.54 Nondiscrimination.
242.55 Labor standards.
Subpart G--Regulatory Agreement, Accounting and Reporting, and
Financial Reporting
242.56 Form of regulation.
242.57 Maintenance of hospital facility.
242.58 Books, accounts, and financial statements.
242.59 Inspection of facilities by Commissioner.
242.61 Management.
242.62 Releases of lien.
242.63 Additional indebtedness and leasing.
242.64 Current and future property.
242.65 Distribution of assets.
242.66 Affiliate transactions.
242.67 New corporations, subsidiaries, affiliations, and mergers.
Subpart H--Miscellaneous Requirements
242.68 Disclosure and verification of Social Security and Employer
Identification Numbers.
242.69 Transfer fee.
242.70 Fees not required.
242.72 Leasing of hospital.
242.73 Waiver of eligibility requirements for mortgage insurance.
242.74 Smoke detectors.
242.75 Title requirements.
242.76 Title evidence.
242.77 Liens.
242.78 Zoning, deed, and building restrictions.
242.79 Environmental quality determinations and standards.
242.81 Lead-based paint poisoning prevention.
242.82 Energy conservation.
242.83 Debarment and suspension.
242.84 Previous participation and compliance requirements.
242.86 Property and mortgage assessment.
242.87 Certifications.
242.89 Supplemental loans.
242.90 Eligibility of mortgages covering hospitals in certain
neighborhoods.
242.91 Eligibility of refinancing transactions.
242.92 Minimum principal loan amount.
242.93 Amendment of regulations.
242.94 Cross-reference.

Authority: 12 U.S.C. 1709, 1710, 1715b, and 1715u; 42 U.S.C. 3535(d).

Subpart A--General Eligibility Requirements

Sec. 242.1 Definitions.
As used in this subpart, the following terms shall have the meaning
indicated: Act means the National Housing Act (12 U.S.C. 1701 et seq.).
Affiliate means a person or entity which, directly or indirectly,
either controls or has the power to control or exert significant
influence on the other, or a person and entity both controlled by a
third person or entity, which may be a parent entity. Indicia of
control include, but are not limited to: interlocking management or
ownership, identity of interests among family members, shared
facilities and equipment, common use of employees, or a business entity
organized following the suspension or debarment of a person or entity
which has the same or similar management, ownership, or principal
employees as the suspended, debarred, ineligible, or voluntarily
excluded person or entity or as defined in the Medicare reimbursement
regulations.
Chronic convalescent and rest means skilled nursing services,
intermediate care services, respite care services, hospice services,
rehabilitation services, and other services of a similar nature.
Commissioner means the Assistant Secretary for Housing--Federal
Housing Commissioner or his or her authorized representatives. (The
operation of the hospital mortgage insurance program is centralized
directly under the Commissioner.)
Debt service coverage ratio is a measure of a hospital's ability to
pay interest and principal with cash generated from current operations.
A high coverage ratio indicates that an institution is in good
financial position to meet its long-term obligations (including its
FHA-insured loan) and service its debt. Higher values are

[[Page 1759]]

preferable. Debt service coverage ratio is calculated as follows:

Debt Service Coverage Ratio =
[GRAPHIC]
[TIFF OMITTED]
TP10JA05.005

Hospital means a facility that has been proposed for approval or
has been approved by the Commissioner under the provisions of this
subpart, and:
(1) Which provides community services for inpatient medical care of
the sick or injured (including obstetrical care);
(2) Where not more than 50 percent of the total patient days during
any year are customarily assignable to the categories of chronic
convalescent and rest, drug and alcoholic, epileptic, mentally
deficient, mental, nervous and mental, and tuberculosis, except that
the 50 percent patient day restriction does not apply to Critical
Access Hospitals (hospitals designated as such under the Medicare Rural
Hospital Flexibility Program) between [effective date of final rule]
and July 31, 2006.
(3) Which is a facility licensed or regulated by the State (or, if
there is no such State law providing for such licensing or regulation
by the State, by the municipality or other political subdivision in
which the facility is located) and is:
(i) A public facility owned by a State or unit of local government
or by an instrumentality thereof, or owned by a public benefit
corporation established by a State or unit of local government or by an
instrumentality thereof;
(ii) A proprietary facility; or
(iii) A facility of a private nonprofit corporation or association.
Identity of interest means a relationship that must be disclosed
and may be prohibited pursuant to the requirements of the Regulatory
Agreement.
Mortgage means such classes of first liens as are commonly given to
secure advances on, or the unpaid purchase price of, real estate under
the laws of the State in which the real estate is located, together
with any credit instrument secured thereby. The mortgage may be in the
form of one or more trust mortgages or mortgage indentures or deeds of
trust securing notes, bonds, or other credit instruments; and by the
same instrument or by a separate instrument, it may create a security
interest in the personalty, including, but not limited to, the
equipment whether or not the equipment is attached to the realty, and
in the revenues and receivables of the hospital.
Mortgagee or lender means the original lender under a mortgage, and
its successors and assigns, and includes the holders of credit
instruments issued under a trust indenture, mortgage, or deed of trust
pursuant to which such holders act by and through a trustee therein
named. (All official contacts and actions by the Commissioner shall be
with or through a HUD-approved lender.)
Mortgagor means the original borrower under a mortgage and its
successors and assigns.
Mortgage Reserve Fund means a trustee-held account to which the
mortgagor contributes and from which withdrawals must be approved by
the Commissioner. The purpose of the fund is to provide the
Commissioner a means to assist the hospital to avoid mortgage defaults
and to preserve the value of the mortgaged property or the hospital's
business.
Non-operating revenues and expenses are those revenues and expenses
not directly related to patient care, hospital-related patient
services, or the sale of hospital-related goods. Examples of items
classified as non-operating are State and Federal income tax, general
contributions, gains and losses from investments, unrestricted income
from endowment funds, and income from related entities. Classification
of items as operating or non-operating shall follow written guidance by
the Commissioner.
Operating margin is operating income divided by operating revenue,
where:
Operating revenue is the revenue from the core patient care
operations of the hospital. It includes revenues from the provision of
such items as patient care (including hospital-based nursing home and
physicians' clinics); transfers from temporarily restricted accounts
that are used for current operating expenses; and patient-related
activities such as the operation of the cafeteria, parking facilities,
television services to patients, sale of medical scrap or waste, etc.
(Additional sources of revenue, which are classified as non-operating,
are deliberately excluded from this measure.)
Operating income is operating revenue minus operating expenses,
where operating expenses are the expenses incurred in providing patient
care, including such items as salaries, supplies, and the cost of capital.
Parent means an organization or entity that controls or has a
controlling interest in another organization or entity.
Personalty means all furniture, furnishings, equipment, machinery,
building materials, appliances, goods, supplies, tools, books, records
(whether in written or electronic form), computer equipment (hardware
and software) and other tangible or electronically stored personal
property (other than fixtures) which are owned or leased by the
borrower or the lessee now or in the future in connection with the
ownership, management or operation of the land or the improvements or
are located on the land or in the improvements, and any operating
agreements relating to the land or the improvements, and any surveys,
plans and specifications and contracts for architectural, engineering
and construction services relating to the land or the improvements,
choses in action and all other intangible property and rights relating
to the operation of, or used in connection with, the land or the
improvements, including all governmental permits relating to any
activities on the land. Personalty also includes all tangible and
intangible personal property used for health care (such as major
movable equipment and systems), accounts, licenses, bed authorities,
certificates of need required to operate the project and to receive
benefits and reimbursements under provider agreements with Medicaid,
Medicare, State and local programs, payments from health care insurers
and any other assistance providers (``Receivables''); all permits,
instruments, rents, lease and contract rights, and equipment leases
relating to the use, operation, maintenance, repair, and improvement of
the hospital. Generally, intangibles shall also include all cash and
cash escrow funds, such as but not limited to: depreciation reserve
fund or mortgage reserve fund accounts, bank accounts, residual receipt
accounts, all contributions, donations, gifts, grants, bequests and
endowment funds by donors, and all other revenues and accounts
receivable from whatever source paid or payable. All personalty shall
be securitized with appropriate

[[Page 1760]]

UCC filings and any excluded personalty shall be indicated in the
Regulatory Agreement.
Preapplication meeting means a meeting between HUD and a potential
applicant for mortgage insurance where there has been a positive
Preliminary Review of the proposed project. The preapplication meeting
is an opportunity for the potential applicant to summarize the proposed
project, for HUD to summarize the application process, and for issues
that could affect the eligibility or underwriting of the proposed loan
to be identified and discussed.
Preliminary Review Letter means a letter from the Commissioner to a
potential applicant communicating the result of the Preliminary Review.
The letter may state that an application for mortgage insurance would
result in a rejection and provide the reasons for this determination,
or state that no factors that would cause an application to be rejected
have been identified, and therefore there appears to be no bar to the
applicant proceeding to the next step in the application process.
Project means the construction, modernization, expansion, or
renovation of an eligible hospital, including equipment, which has been
proposed for approval or has been approved by the Commissioner under
the provisions of this subpart, including the financing and
refinancing, if any, plus all related activities involved in completing
the improvements to the property.
Regulatory Agreement means the agreement under which all mortgagors
shall be regulated by the Commissioner, as long as the Commissioner is
the insurer or holder of the mortgage, in a published format determined
by the Commissioner, and such additional covenants and restrictions as
may be determined necessary by the Commissioner on a case-by-case basis.
Security instrument means a mortgage, deed of trust, and any other
security for the indebtedness, and shall be deemed to be the mortgage
as defined by the National Housing Act, as amended, implementing
regulations, and HUD directives.
State includes the several States, Puerto Rico, the District of
Columbia, Guam, the Trust Territory of the Pacific Islands, American
Samoa, and the Virgin Islands.
Surplus Cash means any cash earned in the applicable fiscal period,
including accounts receivable, remaining after the following have been
achieved:
(1) Mortgage payments for the preceding 12 months have been made
when due, including any grace period;
(2) There is a Debt Service Coverage Ratio greater than or equal to
1.50;
(3) Days in Accounts Receivable are less than or equal to 80;
(4) Days in Accounts Payable are less than or equal to 80;
(5) The Mortgage Reserve Fund is compliant with the scheduled balance;
(6) All income, property, and statutory employer payroll taxes and
employee payroll withholding contributions have been deposited as required;
(7) The Current Ratio is greater than or equal to 1.50;
(8) Days of cash on hand are greater than or equal to 15 days; and
(9) The payment of:
(i) All sums due or currently required to be paid under the terms
of the Mortgage Note and Regulatory Agreement due on the first day of
the month following the end of the fiscal period, including, without
limitation, in the Mortgage Reserve Fund or any other reserves as may
be required by HUD; and
(ii) All other obligations of the hospital (accounts payable and
accrued, unescrowed expenses), unless funds for payment are set aside
or HUD has approved deferment of payment.
Secretary means the Secretary of Housing and Urban Development or
his or her authorized representatives.
Working capital means the excess of current assets over current
liabilities.

Sec. 242.2 Program financial self-sufficiency.

The Commissioner shall administer the Section 242 program in such a
way as to encourage financial self-sufficiency and actuarial soundness;
i.e., to avoid mortgage defaults and claims for insurance benefits in
order to protect the mortgage insurance fund.

Sec. 242.3 Encouragement of certain programs.

The activities and functions provided for in this part shall be
carried out so as to encourage provision of comprehensive health care,
including outpatient and preventive care as well as hospitalization, to
a defined population, and in the case of public and certain not-for-
profit hospitals, to encourage programs that are undertaken to provide
essential health care services to all residents of a community
regardless of ability to pay.

Sec. 242.4 Eligible hospitals.

The hospital to be financed with a mortgage insured under this part
shall involve the construction of a new hospital or the substantial
rehabilitation (or replacement) of an existing hospital.

Sec. 242.5 Eligible mortgagees.

The lender requirements set forth in 24 CFR part 202 regarding
approval, recertification, withdrawal of approval, approval for
servicing, report requirements and conditions for supervised
mortgagees, nonsupervised mortgagees, investing mortgagees, and
governmental and similar institutions, apply to these programs.

Sec. 242.6 Property requirements.

The mortgage, to be eligible for insurance, shall be on property
located in a State, as defined in Sec. 242.1. The mortgage shall cover
real estate in which the mortgagor has one of the following interests:
(a) A fee simple title.
(b) A lease for not less than 99 years that is renewable.
(c) A lease having a term of not less than 50 years to run from the
date the mortgage is executed.

Sec. 242.7 Maximum mortgage amounts.

The mortgage shall involve a principal obligation not in excess of
90 percent of the Commissioner's estimate of the replacement cost of
the hospital, including the equipment to be used in its operation when
the proposed improvements are completed and the equipment is installed.

Sec. 242.8 Standards for licensure and methods of operation.

The Secretary shall require satisfactory evidence that the hospital
will be located in a State or political subdivision of a State with
reasonable minimum standards of licensure and methods of operation for
hospitals, and satisfactory assurance that such standards will be
applied and enforced with respect to the hospital.

Sec. 242.9 Physician ownership.

Ownership of an interest in the mortgagor by physicians or other
professionals practicing in the hospital is permitted within limits
determined by the Commissioner to avoid insurance risks that may be
associated with such ownership. The Commissioner shall determine if the
proposed mortgagor will be at low risk for violation of regulations of
the U. S. Department of Health and Human Services, other Federal
regulations, and State regulations governing kickbacks, self-referrals,
and other issues that could increase the risk of eventual default. The
Commissioner's determination shall be based on an unqualified legal
opinion as to compliance with

[[Page 1761]]

applicable Federal law, among other considerations.

Sec. 242.10 Eligible mortgagors.

The mortgagor shall be a public mortgagor (i.e., an owner of a
public facility), a private nonprofit corporation or association, or a
profit-motivated mortgagor meeting the definition of ``hospital'' in
Sec. 242.1. The mortgagor shall be approved by the Commissioner and
shall possess the powers necessary and incidental to operating a
hospital. Eligible proprietary or profit-motivated mortgagors may
include for-profit corporations, limited partnerships, and limited
liability corporations and companies, but may not include natural
persons, joint ventures, and general partnerships. Any proposed
mortgagor must demonstrate that it has a continuity of organization
commensurate with the term of the mortgage loan being insured. For new
organizations, or those whose continuity is necessarily dependent upon
an individual or individuals, broad community participation is required.

Sec. 242.11 Regulatory compliance required.

An application for insurance of a mortgage under this part shall be
considered only in connection with a hospital that is in substantial
compliance with regulations of the Department of Health and Human
Services and the various States governing the operation and
reimbursement of hospitals. A hospital that is under investigation by
any State or Federal agency for statutory or regulatory violations is
not eligible so long as the investigation is unresolved, unless the
Commissioner determines that the investigation is minor in nature, that
is, the investigation has little chance of resulting in substantial
liabilities or of otherwise substantially harming the creditworthiness
of the hospital.

Sec. 242.13 Parents and affiliates.

As a condition of issuing a commitment, the Commissioner may
require corporate parents, affiliates, or principals of the proposed
mortgagor to provide assurances, guarantees, or collateral. The
Commissioner may also require financial and operational information on
the parent, other businesses owned by the parent, or affiliates of the
proposed mortgagor and may also require a parent or affiliate to be
regulated by the Commissioner as to certain actions which could impact
on the insurance of a mortgage loan for the benefit of the hospital.

Sec. 242.14 Mortgage reserve fund.

As a condition of issuing a commitment, the Commissioner shall
require establishment of a Mortgage Reserve Fund (MRF), a trustee-held
account to which the mortgagor will contribute and from which
withdrawals must be approved by the Commissioner. The mortgagor shall
be required to make contributions to the MRF such that, with fund
earnings, the MRF will build to one year of debt service at five years
following commencement of amortization, increasing thereafter to two
years of debt service on and after ten years according to a schedule
established by the Commissioner, unless the Commissioner determines
that a different schedule of contributions is appropriate based on the
mortgagor's risk profile, reimbursement structure, or other
characteristics. In particular, hospitals that receive cost-based
reimbursement may be required to have MRFs that build to more than two
years of debt service. Expenditures from the fund are made at the
Commissioner's sole discretion or in accordance with the mortgagor's
MRF Schedule. Upon termination of insurance, the balance of the MRF
shall be returned to the mortgagor provided that all obligations to HUD
have been met.

Sec. 242.15 Limitation on refinancing of existing indebtedness.

Some existing long-term debt may be refinanced with the proceeds of
a section 242 insured loan; however, the hard costs of construction and
equipment must represent at least 20 percent of the total mortgage amount.

Subpart B--Application Procedures and Commitments

Sec. 242.16 Applications.

(a) Application process. (1) Market need. The approval process
entails a determination of the market need of the proposal and
stresses, on a market-wide basis, the impact of the proposed facility
on, and its relationship to, other health care facilities and services
(particularly other hospitals with mortgages insured under this part
and hospitals that have a disproportionate share of Medicaid and
uninsured patients or provide a substantial amount of charity care);
the number and percentage of any excess beds; and demographic
projections. Generally, section 242 insurance may support start-up
hospitals or major expansions of existing hospitals only if existing
hospital capacity or services are clearly not adequate to meet the
needs of the population in the service area.
(i) If the State has an official procedure for determining need for
hospitals, the Commissioner shall require that such procedure be
followed before the application for insurance is submitted, and that
the application shall document that need has also been established
under that procedure.
(ii) The following factors are relevant in evaluating market need
for the project and should be addressed, as applicable, in the study of
market need and feasibility submitted with the application. Because
each hospital presents a unique situation, there is no formula or
cutoff level that applies to all applications:
(A) Service area definition;
(B) Existing or proposed hospital;
(C) Designation as sole community provider, critical access
hospital, or rural referral center;
(D) Community-wide use rates (discharges and days/1000);
(E) Statewide use rates (for benchmarking purposes);
(F) Current population and five-year projection by age cohort;
(G) Staffed vs. licensed beds;
(H) Applicant hospital's occupancy rate;
(I) Competitors' occupancy rates;
(J) Outpatient volume;
(K) Availability of emergency services;
(L) Teaching hospital status;
(M) Services offered by hospitals in the service area;
(N) Migration of patients out of the service area;
(O) Planned construction at other facilities in the region;
(P) Historical market share by major service category;
(Q) Disproportionate Share Hospital designation; and
(R) Distance to other hospitals.
(2) Operating margin and debt service coverage ratio. (i) Hospitals
with an aggregate operating margin of less than 0.00 when calculated
from the three most recent annual audited financial statements are not
eligible for section 242 insurance unless the Commissioner determines,
based on the financial data in those statements, that the hospital has
achieved a financial turnaround resulting in a positive operating
margin in the most recent year, calculated using classifications of
items as operating or non-operating in accordance with guidance that
shall be provided in written directives by the Commissioner.
(ii) Hospitals with an average debt service coverage ratio of less
than 1.25 in the three most recent audited years are not eligible for
section 242 insurance unless the Commissioner determines, based on the
audited financial data, that the hospital has achieved a financial
turnaround resulting in a debt service

[[Page 1762]]

coverage ratio of at least 1.40 in the most recent year. In cases of
refinancing at a lower interest rate, the Commissioner may authorize
the use of the projected debt service requirement in lieu of the
historical debt in calculating the debt service coverage ratios for
each of the prior three years. In cases where the Commissioner
authorizes the use of the projected debt service requirement in lieu of
the historical debt to determine the debt service coverage ratio,
hospitals must have an average debt service coverage ratio of 1.40 or
greater.
(3) Financial Feasibility. The approval process entails a
determination of the financial feasibility of the proposal, i.e., a
determination that it is probable that the proposed mortgagor will be
able to meet its debt service requirements during the life of the
proposed mortgage. It includes analysis of the reimbursement structure
of the proposed hospital (including patient/payer mix); actions of
competitors; and the probable projected impact on the proposed hospital
of general health care system trends, such as the development of
alternative health care delivery systems and new reimbursement methods.
In addition to historical operating margin, determination of financial
feasibility includes, but is not limited to, evaluation of the
following factors. The application must address, and HUD will review,
each of the following factors:
(i) Current and projected gains from operations and a manageable
debt load using reasonable assumptions;
(ii) Current debt service coverage ratio of 1.25 or higher and
projected debt service coverage ratio of 1.40 or higher;
(iii) Cushion in the balance sheet sufficient to demonstrate the
ability to withstand short periods of net operating losses without
jeopardizing financial viability;
(iv) Patient utilization forecasts (including average length of
stay, case intensity, discharges, area-wide use rates) that are
consistent with the hospital's historical trends, future service mix,
market trends, population forecasts, and business climate;
(v) The hospital's demonstrated ability to position itself to
compete in its marketplace;
(vi) Organizational affiliations or relationships that help
optimize financial, clinical, and operational performance;
(vii) Management's demonstrated ability to operate effectively and
efficiently, and to develop effective strategies for addressing problem
areas;
(viii) Systems in place to monitor hospital operations, revenues,
and costs accurately and in a timely manner;
(ix) A Board that is appropriately constituted and provides
effective oversight;
(x) Required licensures and approvals; and
(xi) Favorable ratings from the Joint Commission on Accreditation
of Healthcare Organizations or other organization acceptable to the
Commissioner.
(4) Preliminary Review. A Preliminary Review is a general overview
of the acceptability of a potential mortgagor performed at the request
of a hospital, a financial consultant representing a hospital, or a
lender, to identify any factors that would likely cause an application
to be rejected, should an application be submitted.
(i) The purpose of the preliminary review is for HUD to identify
any obvious factors that would cause an application to be rejected,
before the potential applicant expends the resources needed to prepare
an application and before the Commissioner expends resources to review
it. The hospital, financial consultant, or lender shall submit a
preliminary information package to the Commissioner that provides
evidence of statutory eligibility, market need, financial strength, and
such other documentation as the Commissioner may require.
(ii) If the Commissioner identifies factors that would cause an
application to be rejected, the Commissioner shall issue a Preliminary
Review Letter notifying the potential applicant that an application for
mortgage insurance would result in a rejection and providing the
reasons for this decision. Also, no further request from the proposed
applicant for a Preliminary Review shall be entertained for a period of
one year from the date of the Commissioner's notification. The
Commissioner may grant an exception to this one-year limitation if,
during the year, there is a major change in the circumstances that
caused the Commissioner to determine that the project would be
rejected. For example, if the sole reason for the Commissioner's
determination was the hospital's failure to meet the historical
operating margin test, and a new audited annual financial statement
contains results that would cause the hospital to meet the test, then
the lender may request a new Preliminary Review within one year of the
Commissioner's notification.
(iii) If the Commissioner does not identify any factors that would
cause an application to be rejected, the Commissioner shall issue a
Preliminary Review Letter advising the potential applicant that there
appears to be no bar to the applicant's proceeding to the next step in
the application process, provided that if a complete application is not
received by the Commissioner within one year following the date of the
Commissioner's letter, another Preliminary Review may be required, at
the Commissioner's discretion, before the application process may proceed.
(iv) The Commissioner's determination in the preliminary review
phase that no factors have been identified that would cause an
application to be rejected shall in no way be construed as an
indication that a subsequent application will be approved.
(5) Preapplication meeting. The next step in the application
process is the preapplication meeting. At the Commissioner's
discretion, this meeting may be held at HUD Headquarters in Washington,
DC, or at another site agreeable to the Commissioner and the potential
applicant. The preapplication meeting is an opportunity for the
potential applicant to summarize the proposed project, for HUD to
summarize the application process, and for issues that could affect the
eligibility or underwriting of the project to be identified and
discussed to the extent possible. Following the meeting, the
Commissioner may:
(i) Advise the potential applicant that there appears to be no bar
to submitting an application for mortgage insurance; or
(ii) Identify issues that must be resolved before a full
application should be submitted for processing.
(b) Application contents. The application for mortgage insurance
shall include exhibits that follow such guidance as to content and
format that the Commissioner shall provide from time to time. The
application shall include:
(1) A description of the proposed sources and uses of funds;
(2) A description of the mortgagor entity, its ownership structure,
and its directors and managers;
(3) A description of the project, the business plan of the
hospital, and how the project will further that plan;
(4) Historical audited financial statements and interim year-to-
date financial results (for existing hospitals);
(5) A study of market need and financial feasibility, addressing
the factors listed in paragraphs (a)(1)(ii), (a)(2) and (a)(3) of this
section, with assumptions and financial forecast clearly presented, and
prepared by a

[[Page 1763]]

certified accounting firm acceptable to HUD;
(6) Architectural plans and specifications;
(7) Evidence that the hospital will be located in a State or
political subdivision of a State with reasonable minimum standards of
licensure and methods of operation for hospitals and satisfactory
assurance that such standards will be applied and enforced with respect
to the hospital;
(8) If the State has an official procedure for determining need for
hospitals, evidence that such procedure has been followed and that need
has been established under that procedure;
(9) Evidence of compliance with Federal and State environmental
regulations; and
(10) Such other exhibits as the Commissioner shall require based
upon the facts pertaining to the particular case.
(c) Fee. An application fee of $1.50 per thousand dollars of the
amount of the loan to be insured shall be paid to the Commissioner at
the time the application is submitted to the Commissioner for approval.
(d) Filing of application. An application for insurance of a
mortgage on a project shall be submitted on an approved FHA form by an
approved mortgagee and by the sponsors of such project to the FHA
Office of Insured Health Care Facilities.
(e) Complete application. Only technically complete applications
will be processed. Partial applications cannot be processed. Upon
determination that an application is complete, the Commissioner shall
issue a Completeness Letter to the applicant stating that the
application is complete.
(f) Application Review. Upon receipt of a complete application, the
Commissioner shall evaluate the application to determine if
eligibility, market need, financial feasibility, and compliance with
applicable regulations (including but not limited to federal
environmental regulations, wage rate regulations, and health care
regulations) have been demonstrated, and to evaluate any other factors,
including but not limited to risk to the Insurance Fund, that should be
considered in determining if the application for mortgage insurance
should be approved. As a part of this review, the Commissioner may
solicit the advice of private consultants and expert staff in the
Department of Health and Human Services and other Federal agencies.
Based on review of the complete application, the Commissioner may
request additional information from the applicant. The timeliness of
the applicant's submission of the additional information may affect the
approval or disapproval of the application. The Commissioner's decision
shall be communicated in the form of a Commitment Letter or a Rejection
Letter within 12 months of the date of the Completeness Letter, unless
the Commissioner for good cause extends the period of review.

Sec. 242.17 Commitments.

(a) Issuance of commitment. Upon approval of an application for
insurance, a commitment shall be issued by the Commissioner setting
forth the terms and conditions under which an insurance endorsement
shall be issued for the hospital. The commitment shall include the
following:
(1) A commitment for insurance of advances reflecting the mortgage
amount, interest rate, mortgage term, date of commencement of
amortization, and other requirements pertaining to the mortgage and
construction project;
(2) HUD's computation of the replacement cost and maximum insurable
mortgage amount;
(3) Financial requirements for closing;
(4) Approval covenants, including any special conditions that must
be satisfied prior to initial endorsement;
(5) Mortgage Reserve Fund Agreement.
(b) Type of commitment. The commitment will provide for the
insurance of advances of mortgage funds during construction.
(c ) Term of commitment. (1) The initial commitment shall be issued
for a period of 90 days.
(2) The term of a commitment may be extended in such manner as the
Commissioner may prescribe, provided, however, that the combined term
of the original commitment and any extensions do not exceed 180 days.
(d) Commitment fee. A commitment fee which, when added to the
application fee, will aggregate $3.00 per thousand dollars of the
amount of the loan set forth in the commitment, shall be paid within 30
days of the date of issuance of the commitment. If such fee is not paid
within this 30-day period, the commitment shall automatically terminate.

Sec. 242.18 Inspection fee.

The commitment may provide for the payment of an inspection fee in
an amount not to exceed $5 per thousand dollars of the commitment. The
inspection fee shall be paid at the time of initial endorsement.

Sec. 242.19 Fees on increases.

(a) Increase in commitment prior to endorsement. An application,
filed prior to initial endorsement, for an increase in the amount of an
outstanding commitment, shall be accompanied by an additional
application fee of $1.50 per thousand dollars computed on the amount of
the increase requested. Any increase in the amount of a commitment
shall be subject to the payment of an additional commitment fee which,
when added to the additional application fee, will aggregate $3.00 per
thousand dollars of the amount of the increase. The additional
commitment fee shall be paid within 30 days after the date of the
amended commitment. If the additional commitment fee is not paid within
30 days, the commitment novation providing for the increased amount
will automatically terminate and the previous commitment will be
reinstated. If an inspection fee was required in the original
commitment, an additional inspection fee shall be paid in an amount not
to exceed $5.00 per thousand dollars of the amount of increase in
commitment. The additional inspection fee shall be paid at the time of
initial endorsement.
(b) Increase in mortgage between initial and final endorsement.
Upon an application, filed between initial and final endorsement, for
an increase in the amount of the mortgage, either by amendment or by
substitution of a new mortgage, an additional application fee of $1.50
per thousand dollars computed on the amount of the increase requested
shall accompany the application. The approval of any increase in the
amount of the mortgage shall be subject to the payment of an additional
commitment fee which, when added to the additional application fee,
will aggregate $3.00 per thousand dollars of the amount of the increase
granted. If an inspection fee was required in the original commitment,
an additional inspection fee shall be paid in an amount not to exceed
$5.00 per thousand dollars of the amount of the increase granted. The
additional commitment and inspection fees shall be paid within 30 days
after the date that the increase is granted.

Sec. 242.20 Reopening of expired commitments.

An expired commitment may be reopened if a request for reopening is
received by the Commissioner no later than 90 days after the date of
expiration of the commitment. The reopening request shall be
accompanied by a fee of 50 cents per thousand dollars of the amount of
the expired commitment. A commitment which has expired because of
failure to pay the commitment fee

[[Page 1764]]

may be reopened only upon payment of the commitment fee and the
reopening fee. If the reopening request is not received by the
Commissioner within the required 90-day period, a new application,
accompanied by an application fee, must be submitted. If a commitment
for an increased amount has expired because of failure to pay an
additional commitment fee based on the amount of the increase, the
reopening fee shall be computed on the basis of the amount of the
commitment increase rather than on the amount of the original commitment.

Sec. 242.21 Refund of fees.

Commitment, inspection, and reopening fees (but not application
fees) may be refunded, in whole or in part, if the Commissioner
determines that the construction or financing of the project has been
prevented because of condemnation proceedings or other legal action
taken by a government body or public agency, or in such other instances
as the Commissioner may determine as being beyond the control of the
applicant and resulting from no fault of the applicant. A transfer fee
may be refunded only in such instances as the Commissioner may determine.

Sec. 242.22 Maximum fees and charges by mortgagee.

The mortgagee may collect from the mortgagor the amount of the fees
provided for in this subpart. The mortgagee may also collect from the
mortgagor an initial service charge not to exceed two percent of the
original principal amount of the mortgage to reimburse the mortgagee
for the cost of closing the transaction. A permanent financing fee not
to exceed three and one-half percent may be collected from the
mortgagor; however, the combined initial service charge and permanent
financing fee may not exceed five and one-half percent in bond
transactions and three and one-half percent in all other transactions.
Any additional charges or fees collected from the mortgagor shall be
subject to prior approval of the Commissioner and shall be clearly
disclosed in the Mortgagee's Certificate.

Sec. 242.23 Adjusted and reduced mortgage amounts.

(a) Adjusted mortgage amount-rehabilitation projects. A mortgage
financing the rehabilitation of an existing hospital shall be subject
to the following limitations, in addition to those set forth in Sec.
242.7:
(1) Property held unencumbered. If the mortgagor is the fee simple
owner of the property and the ownership is not encumbered by an
outstanding indebtedness, the mortgage shall not exceed 100 percent of
the Commissioner's estimate of the cost of the proposed rehabilitation.
(2) Property subject to existing mortgage. If the mortgagor owns
the property subject to an outstanding indebtedness, which is to be
refinanced with part of the insured mortgage, the mortgage shall not
exceed the total of the following:
(i) The Commissioner's estimate of the cost of rehabilitation, plus
(ii) Such portion of the outstanding indebtedness as does not
exceed 90 percent of the Commissioner's estimate of the fair market
value of such land and improvements prior to rehabilitation.
(3) Property to be acquired. If the property is to be acquired by
the mortgagor and the purchase price is to be financed with a part of
the insured mortgage, the mortgage shall not exceed 90 percent of the
total of the following:
(i) The Commissioner's estimate of the cost of rehabilitation, plus
(ii) The actual purchase price of the land and value of
improvements or the Commissioner's estimate (prior to rehabilitation)
of the fair market value of such land and improvements, whichever is
the lesser.
(b) Reduced mortgage amount--leaseholds. In the event the mortgage
is secured by a leasehold estate rather than a fee simple estate, the
value or replacement cost of the property described in the mortgage
shall be the value or replacement cost of the leasehold estate (as
determined by the Commissioner), which shall in all cases be less than
the value or replacement cost of the property in fee simple.
(c) Cash equity. The Commissioner shall have the discretion to
evaluate, on a case-by-case basis, the amount of equity that a
mortgagor must supply depending upon the financial circumstances of
each hospital facility. Exercise of this discretion shall never cause
loan-to-value to exceed 90 percent, although it may cause it to be less
than 90 percent. A private mortgagor must supply equity in cash. The
equity contribution may not be made from borrowed funds. A nonprofit or
public mortgagor, in the Commissioner's discretion and subject to 24
CFR 242.49, may supply equity in the form of a letter of credit.

Sec. 242.24 Working capital.

In the case of a new hospital or a hospital expansion, the
Commissioner shall establish, on a case-by-case basis, the amount of
working capital that must be deposited in cash or a letter of credit
(or combination) to be available to the new hospital upon commencement
of operations. Generally, the working capital shall not be borrowed
funds unless the Commissioner determines that there are offsetting
financial strengths to compensate for the risk associated with borrowing.

Subpart C--Mortgage Requirements

Sec. 242.25 Mortgage form and disbursement of mortgage proceeds.

(a) Mortgage form. The mortgage shall be:
(1) Executed on a form approved by the Commissioner for use in the
jurisdiction in which the property covered by the mortgage is situated,
which form shall not be changed without the prior written approval of
the Commissioner.
(2) Executed by an eligible mortgagor.
(b) Disbursement of mortgage proceeds. The mortgagee shall be
obligated, as a part of the mortgage transaction, to disburse the
principal amount of the mortgage to (or for the account of) the
mortgagor or to his or her creditors for his or her account and with
his or her consent.

Sec. 242.26 Agreed interest rate.

(a) The mortgage shall bear interest at the rate agreed upon by the
mortgagee and the mortgagor.
(b) The amount of any increase approved by the Commissioner in the
mortgage amount between initial and final endorsement in excess of the
amount that the Commissioner had committed to insure at initial
endorsement shall bear interest at the rate agreed upon by the
mortgagee and the mortgagor.

Sec. 242.27 Maturity.

The mortgage shall have a maturity not to exceed 25 years from the
date amortization begins.

Sec. 242.28 Allowable costs for consultants.

Consulting fees for work essential to the development of the
project may be included in the insured mortgage. Allowable consulting
fees include those for analysis of market demand, expected revenues,
and costs; site analysis; architectural and engineering design; and
such other fees as the Commissioner may determine to be essential to
project development. Fees for work performed more than one year prior
to application are not allowable. Fees for work performed by any party
with an identity of interest with the proposed mortgagor or mortgagee
are not allowable.

[[Page 1765]]

Sec. 242.29 Payment requirements.

The mortgage shall provide for payments on the first day of each
month in accordance with an amortization plan agreed upon by the
mortgagor, the mortgagee and the Commissioner.

Sec. 242.30 Application of payments.

All payments to be made by the mortgagor to the mortgagee shall be
added together and the aggregate amount thereof shall be paid by the
mortgagor each month in a single payment. The mortgagee shall apply
each payment received to the following items in the following order:
(a) Premium charges under the contract of mortgage insurance;
(b) Ground rents, taxes, special assessments, and fire and other
hazard insurance premiums;
(c) Interest on the mortgage; and
(d) Amortization of the principal of the mortgage.

Sec. 242.31 Accumulation of accruals.

(a) The mortgage shall provide for payments by the mortgagor to the
mortgagee on each interest payment date of an amount sufficient to
accumulate in the hands of the mortgagee one payment period prior to
its due date, the next annual mortgage insurance premium payable by the
mortgagee to the Commissioner. Such payments shall continue only so
long as the contract of insurance shall remain in effect.
(b) The mortgage shall provide for such equal monthly payments by
the mortgagor to the mortgagee as will amortize the ground rents, if
any, and the estimated amount of all taxes, water charges, special
assessments, and fire and other hazard insurance premiums, within a
period ending one month prior to the dates on which the same become
delinquent. The mortgage shall further provide that such payments shall
be held by the mortgagee, for the purpose of paying such items before
they become delinquent. The mortgage shall also make provision for
adjustments in case such estimated amounts shall prove to be more, or
less, than the actual amounts so paid therefore by the mortgagor.

Sec. 242.32 Covenant against liens.

The mortgage shall contain a covenant against the creation by the
mortgagor of liens against the property superior or inferior to the
lien of the mortgage except for such liens as may be approved by the
Commissioner.

Sec. 242.33 Covenant for malpractice, fire and other hazard insurance.

The mortgage shall contain a covenant binding the mortgagor to
maintain adequate malpractice liability, fire, and extended coverage
insurance on the property.

Sec. 242.35 Mortgage lien certifications.

The mortgagor shall certify at the final endorsement of the
mortgage for insurance as to each of the following:
(a) That the mortgage is the first lien upon and covers the entire
hospital, as hospital is defined in Sec. 242.1.
(b) That the property upon which the improvements have been made or
constructed and the equipment financed with mortgage proceeds are free
and clear of all liens other than the insured mortgage and such other
secondary liens as may be approved by the Commissioner.
(c) That the Security Agreement and Uniform Commercial Code
financing statements establish a first lien on the personalty of the
mortgagor, including but not limited to equipment, either acquired with
mortgage proceeds or otherwise before or after initial endorsement of
the mortgage, and on the personalty of the hospital all as defined in
the Regulatory Agreement between the Commissioner and the hospital.
(d) That the certificate sets forth all unpaid obligations in
connection with the mortgage transaction, the purchase of the mortgaged
property, the construction or rehabilitation of the project, or the
purchase of the equipment financed with mortgage proceeds.

Sec. 242.37 Mortgage prepayment.

(a) Prepayment privilege. Except as provided in paragraph (c) of
this section or otherwise established by the Commissioner, the mortgage
shall contain a provision permitting the mortgagor to prepay the
mortgage in whole or in part upon any interest payment date, after
giving the mortgagee 30 days notice in writing in advance of its
intention to so prepay.
(b) Prepayment charge. The mortgage may contain a provision for
such charge, in the event of prepayment of principal, as may be agreed
upon between the mortgagor and the mortgagee, subject to the following:
(1) The mortgagor shall be permitted to prepay up to 15 percent of
the original principal amount of the mortgage in any one calendar year
without any such charge.
(2) Any reduction in the original principal amount of the mortgage
resulting from the certification of cost, which the Commissioner may
require, shall not be construed as a prepayment of the mortgage.
(c) Prepayment of bond-financed or GNMA-securitized mortgages.
Where the mortgage is given to secure GNMA mortgage-backed securities
or a loan made by a lender that has obtained the funds for the loan by
the issuance and sale of bonds or bond anticipation notes, or both, the
mortgage may contain a prepayment restriction and prepayment penalty
charge acceptable to the Commissioner as to term, amount, and
conditions.
(d) HUD override of prepayment restrictions. In the event of a
default, the Commissioner may override any lockout, prepayment penalty,
or combination of penalties in order to facilitate a partial or full
refinancing of the mortgaged property and avoid a claim.

Sec. 242.38 Late charge.

The mortgage may provide for the collection by the mortgagee of a
late charge in accordance with terms, conditions, and standards of the
Commissioner for each dollar of each payment to interest or principal
more than 15 days in arrears to cover the expense involved in handling
delinquent payments. Late charges shall be separately charged to and
collected from the mortgagor and shall not be deducted from any
aggregate monthly payment.

Subpart D--Endorsement for Insurance

Sec. 242.39 Insurance endorsement.

Initial endorsement of the credit instrument shall occur before any
mortgage proceeds are insured and the time of final endorsement shall
be as set forth in paragraph (b) of this section.
(a) Initial endorsement. The Commissioner shall indicate the
insurance of the mortgage by endorsing the original credit instrument
and identifying the section of the Act and the regulations under which
the mortgage is insured and the date of insurance.
(b) Final endorsement. When all advances of mortgage proceeds have
been made and all the terms and conditions of the commitment have been
met to the Commissioner's satisfaction, the Commissioner shall indicate
on the original credit instrument the total of all advances approved
for insurance and again endorse such instrument.
(c) Contract rights and obligations. The Commissioner and the
mortgagee or lender shall be bound from the date of initial endorsement
by the provisions of the Contract of Mortgage Insurance set forth in
subpart B of this part.

[[Page 1766]]

Sec. 242.40 Mortgagee Certificate.

At initial endorsement the mortgagee shall execute a Mortgagee
Certificate in a form prescribed by the Commissioner.

Sec. 242.41 Certification of cost requirements.

Before initial endorsement of the mortgage for insurance, the
mortgagor, the mortgagee, and the Commissioner shall enter into an
agreement in form and content satisfactory to the Commissioner for the
purpose of precluding any excess of mortgage proceeds over statutory
limitations. Under this agreement, the mortgagor shall disclose its
relationship with the builder, including any collateral agreement, and
shall agree:
(a) To execute a Certificate of Actual Costs, upon completion of
all physical improvements on the mortgaged property.
(b) To apply any cost savings in accordance with the provisions below.

Sec. 242.42 Certificates of actual cost.

(a) The mortgagor's certificate of actual cost, in a form
prescribed by the Commissioner, shall be submitted upon completion of
the physical improvements to the satisfaction of the Commissioner and
before final endorsement, except that in the case of an existing
hospital that does not require substantial rehabilitation and where the
commitment provides for completion of specified repairs after
endorsement, a supplemental certificate of actual cost will be
submitted covering the completed costs of any such repairs. The
certificate shall show the actual cost to the mortgagor, after
deduction of any kickbacks, rebates, trade discounts, or other similar
payments to the mortgagor, or to any of its officers, directors,
stockholders, partners or other entity member ownership, of
construction and other costs, as prescribed by the Commissioner.
(b) The Certificate of Actual Cost shall be verified by an
independent certified public accountant or independent public
accountant in a manner acceptable to the Commissioner.
(c) Upon the Commissioner's approval of the mortgagor's
certification of actual cost, such certification shall be final and
incontestable except for fraud or material misrepresentation on the
part of the mortgagor.

Sec. 242.43 Application of cost savings.

Any cost savings identified through the cost certification process
shall be used to:
(a) Reduce the principal amount of the mortgage and the mortgagor's
cash equity contribution proportionally, and/or
(b) Fund any additional construction, modernization,
rehabilitation, or purchase of equipment approved by the Commissioner.

Subpart E--Construction

Sec. 242.44 Construction standards.

Work designed and performed under this section shall conform to the
standards adopted by the Commissioner, which as a minimum, shall
include the ``Guidelines for Construction and Equipment of Hospital and
Medical Facilities,'' which is regularly updated and published by the
American Institute of Architects.

Sec. 242.45 Early commencement of work.

(a) Pre-commitment work. Prior to the issuance of a commitment by
the Commissioner, the mortgagor may request for good cause the
commencement of certain necessary preliminary site work of the project
within legal guidelines and State law. Such work can commence only
after the review and concurrence of the work by the Commissioner,
including the environmental review under 24 CFR 242.79, and the
agreement to certain conditions by the applicant. The work must meet
all requirements and guidelines as if it were approved for mortgage
insurance and is accomplished at the sole risk of the applicant prior
to the initial endorsement.
(b) Early Start. Subsequent to the issuance of a commitment, if the
mortgagor requests the commencement of the project, the work may
commence after the review of the request by the Commissioner, including
the environmental review under 24 CFR 242.79, and the agreement to
certain conditions by the applicant. Prior to the initial endorsement,
the work is accomplished at the sole risk of the applicant.
(c) Prepayment of inspection fee. The applicant shall pay the
inspection fee to HUD before pre-commitment or early start work commences.
(d) Work started prior to application submission. The Commissioner
has the sole discretion to allow certain initial site preparation to be
incorporated into the application if HUD has reviewed and approved the
drawings and specifications and has inspected the work.
(e) No expressed or implied intent. Approval to proceed under
paragraphs (a) and (b) of this section shall in no way be construed as
indicating any intent, expressed or implied, on the part of the
Commissioner to approve, disapprove, or make any undertaking or promise
whatsoever with respect to the application or with respect to any
commitment for mortgage insurance. Any work under paragraphs (a) and
(b) of this section shall be accomplished at the sole risk and
responsibility of the applicant.

Sec. 242.46 Insured advances--building loan agreement.

Prior to the initial endorsement of the mortgage for insurance, the
mortgagor and mortgagee shall execute a building loan agreement,
approved by the Commissioner, setting forth the terms and conditions
under which progress payments may be advanced during construction. To
be covered by mortgage insurance, or to be included as an eligible
cost, each progress payment involving mortgage proceeds and the owner's
equity requirement shall be approved by the Commissioner.

Sec. 242.47 Insured advances for building components stored off-site.

(a) Building components. In insured advances for building
components stored off-site, the term building component shall mean any
manufactured or pre-assembled part of a structure which the
Commissioner has specifically identified for incorporation into the
property and has designated for off-site storage because it is of such
size or weight that:
(1) Storage of the number of components required for timely
construction progress at the construction site is impractical, or
(2) Weather damage or other adverse conditions prevailing at the
construction site would make storage at the site impractical or unduly
costly.
(b) Storage. (1) An insured advance may be made for up to 90
percent of the invoice value (to exclude costs of transportation and
storage) of the building components stored off-site if the components
are stored at a location approved by the mortgagee and the Commissioner.
(2) Each building component shall be adequately marked so as to be
readily identifiable in the inventory of the off-site location. Each
component shall be kept together with all other building components of
the same manufacturer intended for use in the same project for which
insured advances have been made and separate and apart from similar
units not for use in the project.
(3) Storage costs, if any, shall be borne by the contractor.
(c) Responsibility for transportation, storage, and insurance of
off-site building components. The general contractor of the insured
mortgaged property shall have the responsibility for:

[[Page 1767]]

(1) Insuring the components in the name of the mortgagor while in
transit and storage; and
(2) Delivering or contracting for the delivery of the components to
the storage area and to the construction site, including payment of freight.
(d) Advances. (1) Before an advance for a building component stored
off-site is insured:
(i) The mortgagor shall:
(A) Obtain a bill of sale for the component;
(B) Give the mortgagee a security agreement, and
(C) File a financing statement in accordance with the Uniform
Commercial Code, and
(ii) The mortgagee shall warrant to the Commissioner that the
security instruments are a first lien on the building components
covered by the instruments except for such other liens or encumbrances
as may be approved by the Commissioner.
(2) Before each advance for building components stored off-site is
insured, the mortgagor's architect shall certify to the Commissioner
that the components, in their intended use, comply with HUD-approved
contract plans and specifications. Under those circumstances permitted
by the Commissioner in which there is no architect, compliance with the
HUD-approved contract plans and specifications shall be determined by
the Commissioner.
(3) Advances may be made only for components stored off-site in a
quantity required to permit uninterrupted installation at the site.
(4) At no time shall the invoice value of building components being
stored off-site, for which advances have been HUD insured, represent
more than 50 percent of the total estimated construction costs for the
insured mortgaged project as specified in the construction contract.
Notwithstanding the preceding sentence and other regulatory
requirements that set bonding requirements, the percentage of total
estimated construction costs insured by advances under this section may
exceed 25 percent but not 50 percent if the mortgagor furnishes
assurance of completion in the form of a corporate surety bond for the
payment and performance each in the amount of 100 percent of the amount
of the construction contract. In no event will insurance of components
stored off-site be made in the absence of a payment, and a performance
bond.
(5) No single advance which is to be insured shall be in an amount
less than ten thousand dollars ($10,000).

Sec. 242.48 Insured advances for certain equipment and long lead items.

The Commissioner may allow advances for certain pieces of equipment
or other construction materials for which a manufacturer, fabricator,
or other source requires an interim payment(s) in order to assure the
timely manufacture or fabrication and delivery to the project site.
Such advances can be made only if a bill of sale or invoice describes
the material or equipment and its completion and delivery dates in no
uncertain terms, and that such displayed timetable is necessary to meet
the requirements of the overall construction schedule cited in the
construction contract.

Sec. 242.49 Funds and finances: deposits and letters of credit.

(a) Deposits. Where the Commissioner requires the mortgagor to make
a deposit of cash or securities, such deposit shall be with the
mortgagee or a depository acceptable to the mortgagee. The deposit
shall be held by the mortgagee in a special account or by the
depository under an appropriate agreement approved by the Commissioner.
(b) Letter of credit. Where the use of a letter of credit is
acceptable to the Commissioner in lieu of a deposit of cash or
securities, the letter of credit shall be issued to the mortgagee by a
banking institution with a Standard & Poor's credit rating of at least
AA or equivalent or by another entity acceptable to the Commissioner
and shall be unconditional and irrevocable. The mortgagee shall be
responsible to the Commissioner for collection under the letter of
credit. In the event a demand for payment thereunder is not immediately
met, the mortgagee shall forthwith provide a cash deposit equivalent to
the undrawn balance of the letter of credit.
(c) Mortgagee not issuer. The mortgagee of record may not be the
issuer of the letter of credit without the prior written consent of the
Commissioner.

Sec. 242.50 Funds and finances: off-site utilities and streets.

The Commissioner shall require assurance of completion of off-site
public utilities and streets in all cases, except where a municipality
or other public body has by agreement (acceptable to the Commissioner)
agreed to install such utilities and streets without cost to the
mortgagor. Where such assurance is required, it shall be either in the
form of a cash escrow deposit or the retention of a specified amount of
mortgage proceeds by the mortgagee. If a cash escrow is used, it shall
be deposited with the mortgagee or with an acceptable trustee or escrow
agent designated by the mortgagee. If mortgage proceeds are used, the
mortgagee shall retain under terms approved by the Commissioner, rather
than disburse at the initial closing of the mortgage, a portion of the
mortgage proceeds allocated to land in the project analysis. As
additional assurance, the Commissioner may also require a surety
company bond or bonds.

Sec. 242.51 Funds and finances: insured advances and assurance of
completion.

(a) Where the estimated cost of construction or rehabilitation is
more than $500,000, the mortgagor shall furnish assurance of completion
in the form of corporate surety bonds for payment and performance, each
in the minimum amount of 100 percent of the accepted bid prices.
(b) All types of assurance of completion shall be on forms approved
by the Commissioner. All surety companies executing a bond and all
parties executing a personal indemnity agreement must be satisfactory
to the Commissioner.
(c) A mortgagee may prescribe more stringent requirements for
assurance of completion than the minimum requirements provided for in
this section.

Sec. 242.52 Construction contracts.

(a) Awarding of contract. A contract for the construction or
rehabilitation of a hospital shall be entered into by a mortgagor with
a builder selected by a competitive bidding procedure acceptable to the
Commissioner.
(b) Form of contract. The construction contract shall be a lump sum
form providing for payment of a specified amount; a construction
management contract with a guaranteed maximum price, the final costs of
which are subject to a certification acceptable to the Commissioner; a
design-build contract with terms and certification requirements
acceptable to the Commissioner; or such other form of contract as may
be acceptable to the Commissioner.
(c) Competitive bidding. A competitive bidding procedure acceptable
to the Commissioner must be used in the selection of bidders to perform
work or otherwise provide service to the project, the costs of which
are included in any form of construction contract cited in paragraph
(b) of this section. Fixed equipment not included in the construction
contract, and movable equipment, may be purchased by securing
quotations or by using competitive bidding procedures.

[[Page 1768]]

Sec. 242.53 Ineligible contractors.

(a) Contracts relating to the construction of the project shall not
be made with a general contractor, a subcontractor, or construction
manager (or any firm, corporation, partnership, or association in which
such contractor, subcontractor, or construction manager has a
substantial interest), the name of which is on the list of ineligible
contractors, subcontractors, or construction managers established by
the Commissioner, or by the Comptroller General under the applicable
regulations of the Secretary of the U.S. Department of Labor.
(b) Contracts relating to the construction of the project shall not
be made with a general contractor that has an identity of interest, as
defined by the Commissioner, with the applicant.
(c) If the Commissioner determines that a contract has been made
contrary to the requirements of paragraphs (a) or (b) of this section
and so notifies the mortgagee, the Commissioner may refuse to insure
any subsequent advances of mortgage proceeds.

Subpart F--Nondiscrimination and Wage Rates

Sec. 242.54 Nondiscrimination.

Hospital facilities financed with mortgages insured under this part
must be made available without discrimination as to race, color,
religion, sex, age, disability, or national origin. Hospitals must be
operated in compliance with all applicable civil rights laws and
regulations, including 24 CFR part 200, subpart J (Equal Employment
Opportunity), and the Americans with Disabilities Act (42 U.S.C. 12101
et seq.). Racially restrictive covenants are per se illegal and their
use is prohibited.

Sec. 242.55 Labor standards.

Projects financed under this part (except under 24 CFR 242.91) must
comply with the prevailing wage standards under the Davis-Bacon Act (40
U.S.C. 3141 et seq.), and implementing U.S. Department of Labor regulations.
(a) The requirements set forth in 29 CFR parts 1, 3, and 5 for
compliance with labor standards laws apply to projects under this
program to the extent that labor standards apply as provided in section
212 of the Act, provided that:
(1) Supplemental loans under section 241 of the Act made in
connection with loans insured under this part are subject to the
provisions of section 212 applicable to mortgages insured under section
242 of the Act.
(b) The requirements stated in 24 CFR part 70 governing HUD waiver
of Davis-Bacon prevailing wage rates for volunteers apply to hospitals
with mortgages insured under this part.
(c) Each laborer or mechanic employed on any facility covered by a
mortgage insured under this part (except under 24 CFR 242.91) shall
receive compensation at a rate not less than one and one-half times the
basic rate of pay for all hours worked in any workweek in excess of
eight hours in any workday or 40 hours in the workweek.
(d) Project commitments, contracts, and agreements, as determined
by the Commissioner, and construction contracts and subcontracts, shall
include terms, conditions, and standards for compliance with applicable
requirements set forth in 29 CFR parts 1, 3, and 5 and section 212 of
the Act.
(e) No advance under a loan or mortgage that is subject to the
requirements of section 212 shall be eligible for insurance unless
there is filed with the application for the advance a certificate as
required by the Commissioner certifying that the laborers and mechanics
employed in construction of the project have been paid not less than
the wage rates required under section 212.

Subpart G--Regulatory Agreement, Accounting and Reporting, and
Financial Requirements

Sec. 242.56 Form of regulation.

As long as the Commissioner is the insurer or holder of the
mortgage, all mortgagors shall be regulated by the Commissioner through
the use of a regulatory agreement in a published format determined by
the Commissioner and such additional covenants and restrictions as may
be determined necessary by the Commissioner on a case-by-case basis. In
addition, all mortgagors shall be subject to the provisions of 24 CFR
part 24 and such other enforcement provisions as may be applicable. The
mortgager shall be subject to monitoring by HUD and the U.S. Department
of Health and Human Services, and their agents, employees, and
contractors, on an ongoing basis for the life of the insured mortgage
to ensure against the risk of default, and the mortgagor must make its
financial records available to the monitoring agencies upon request.

Sec. 242.57 Maintenance of hospital facility.

The mortgagor shall maintain the hospital's grounds and buildings
and the equipment financed with mortgage proceeds in good repair and
shall promptly complete such repairs and maintenance as the
Commissioner considers necessary.

Sec. 242.58 Books, accounts, and financial statements.

(a) Books and accounts. The mortgagor's books and accounts relating
to the operation of the physical facilities of the hospital shall be
established in a manner satisfactory to the Commissioner, and shall be
kept in accordance with the requirements of the Commissioner as long as
the mortgage is insured or held by the Commissioner.
(b) Financial reports. The mortgagor shall file with the Commissioner:
(i) Annual audited financial statements in accordance with the
guidance below,
(ii) Quarterly unaudited financial reports, within 40 days
following the end of each quarter of the mortgagor's fiscal year,
(iii) If requested by the Commissioner, monthly financial reports
within 40 days following the end of each month,
(iv) Board-certified annual financial results within 120 days
following the close of the fiscal year (if the annual audited financial
statement has not yet been filed with the Commissioner) and at such
other times as the Commissioner may designate on a case-by-case basis,
and
(v) Such other financial and utilization reports as the
Commissioner may require.
(c) Audits. (1) Not-for-profit organizations shall conduct audits
in accordance with the Consolidated Audit Guide for Audits of HUD
Programs (Handbook 2000.04) and OMB Circular A-133 (Audits of States,
local governments and nonprofit organizations).
(2) For-profit organizations shall conduct audits in accordance
with the Consolidated Audit Guide for Audits of HUD Programs (Handbook
2000.04).
(d) Changes in accounting policies. The annual audited financial
statements shall identify any changes in accounting policies and their
financial effect on the balance sheet and on the income statement.
(e) Compliance reporting. The mortgagor shall instruct the auditor
of the annual financial statement to include in its report an
evaluation of the mortgagor's compliance with the Regulatory Agreement.
(f) Books of management agents. The books and records of management
agents, lessees, operators, managers, and affiliates, as they pertain
to the operations of the project, shall be maintained in accordance
with Generally Accepted Accounting

[[Page 1769]]

Principles (GAAP) and shall be open and available to inspection by HUD,
after reasonable prior notice, during normal office hours, at the
project or other mutually agreeable location. Every contract executed
on behalf of the project with any of the aforesaid parties shall
include the provision that the books and records of such entities shall
be properly maintained and open to inspection during normal business
hours by HUD at the project or other mutually agreeable location.
(g) Medicare cost reports. Upon request, the mortgagor shall
provide to the Commissioner a copy of the Medicare Cost Report most
recently submitted to the Centers for Medicare and Medicaid Services
(an agency of the Department of Health and Human Services), along with
related financial documents.

Sec. 242.59 Inspection of facilities by Commissioner.

The mortgaged property (including buildings and equipment) and the
books, records, and documents relating to the operation of the physical
facilities of the hospital shall be subject to inspection and
examination by the Commissioner or his or her authorized representative
at all reasonable times.

Sec. 242.61 Management.

The mortgagor shall provide for management of the hospital in a
manner satisfactory to the Commissioner.
(a) Contract management. The mortgagor shall not execute a
management agreement or any other contract for management of the
hospital without the Commissioner's prior written approval. Any
management agreement or contract shall contain a provision that it
shall be subject to termination without penalty and with or without
cause, upon written request by the Commissioner addressed to the
mortgagor and management agent.
(b) Principals. HUD shall have the authority to require that any
principals of the mortgagor, including but not limited to board members
of a corporate entity, be removed, substituted, or terminated for cause
upon written request by the Commissioner addressed to the mortgagor.
(c) Employees. HUD shall have the authority to require that any key
management employees of the mortgagor (as defined and determined solely
by HUD) be terminated for cause upon written request by the
Commissioner addressed to the mortgagor.
(d) Procedures upon receipt of request under paragraphs (a) through
(c) of this section. Upon receipt of such requests under paragraphs (a)
through (c) of this section, the mortgagor shall immediately terminate
said management agreement, principals or employees within the shortest
applicable period the Commissioner determines appropriate and shall
make arrangements satisfactory to the Commissioner for on-going proper
management of the hospital.

Sec. 242.62 Releases of lien.

The mortgagor shall not sell, dispose of, transfer, or permit to be
encumbered any security property without the prior approval of the
lender and Commissioner, subject to thresholds the Commissioner may
establish for the approval requirement. Where there is a partial
release of lien, the lender must make a determination, subject to
review by the Commissioner, that the remaining or replacement property
subject to the first lien provides adequate security for the remaining
principal indebtedness.

Sec. 242.63 Additional indebtedness and leasing.

The mortgagor shall not enter into any long-term debt, short-term
debt, or equipment leases except in conformance with policies and
procedures established by the Commissioner.

Sec. 242.64 Current and future property.

All current or future property or personalty (all as defined in the
Regulatory Agreement) of the mortgagor on or off mortgaged real estate
(except that specifically restricted by donors or specifically excluded
by the Commissioner) will be considered as part of the HUD-insured
hospital and subject to all provisions of the HUD regulatory agreement.
All equipment acquired by the hospital following initial endorsement
and at any time during the term of the loan shall become subject to the
lien of the security agreement and any Uniform Commercial Code
Financing Statements filed pursuant to the security agreement, unless
the mortgagor specifically requests and the Commissioner for good cause
approves, subordination of the lien of the insured mortgagee on
specific personalty for specific periods of time. The first lien on the
realty (as defined in the regulatory agreement and as identified in the
security instrument) cannot be subordinated in whole or in part.

Sec. 242.65 Distribution of assets.

The Commissioner shall establish financial thresholds and
procedures for the distribution of surplus cash and other assets.
Surplus cash that meets the definition in 24 CFR 242.1, or cash that
has been expressly approved for distribution by the Commissioner, may
be distributed to other organizations formally affiliated with the
mortgagor, a parent organization with which the mortgagor is also
affiliated, partners, or stockholders, in accordance with those
financial thresholds and procedures set forth in the regulatory
agreement. Other assets may be distributed to other organizations
formally affiliated with the mortgagor, a parent organization with
which the mortgagor is also affiliated, partners, or stockholders, in
accordance with those financial thresholds and procedures set forth in
the regulatory agreement, and in accordance with the release of lien
conditions in 24 CFR 242.62, if applicable.

Sec. 242.66 Affiliate transactions.

Transactions that are arms-length are permitted as specified in the
Regulatory Agreement. Transactions with affiliates that are not arms-
length are not permitted except with the prior written approval of the
Commissioner in accordance with such policies and procedures as the
Commissioner shall prescribe.

Sec. 242.67 New corporations, subsidiaries, affiliations, and mergers.

The mortgagor shall not establish, develop, organize, acquire,
become the sole member of, or acquire an interest sufficient to require
disclosure on the audited financial statements of the mortgagor, in any
corporation, subsidiary, or affiliate organization other than those
with which the mortgagor was affiliated as of date of application,
without the prior approval of the Commissioner. The mortgagor shall
obtain the Commissioner's written approval for all future mergers.

Subpart H--Miscellaneous Requirements

Sec. 242.68 Disclosure and verification of Social Security and
Employer Identification Numbers.

The requirements set forth in 24 CFR part 5, regarding the
disclosure and verification of social security numbers and employer
identification numbers, and employer identification numbers by
applicants and participants in assisted mortgage and loan insurance and
related programs, apply to this program.

Sec. 242.69 Transfer fee.

Upon application for review of a transfer of physical assets or the
substitution of mortgagors, a transfer fee of 50 cents per thousand
dollars of the outstanding principal balance of the mortgage shall be
paid to the

[[Page 1770]]

Commissioner. A transfer fee is not required if both parties to the
transfer transaction are not-for-profit or public organizations.

Sec. 242.70 Fees not required.

The payment of an application, commitment, inspection, or reopening
fee shall not be required in connection with the insurance of a
mortgage involving the sale by the Secretary of any property acquired
under any section or title of the Act.

Sec. 242.72 Leasing of hospital.

Leasing of a hospital in its entirety is prohibited.
Notwithstanding this prohibition, any proposal in which leasing of the
entire facility is a factor due to State law prohibitions against the
mortgaging of health care facilities by State entities shall be
considered on a case-by-case basis. Also, leasing of a hospital that
has an existing Section 242 insured loan is permitted if the
Commissioner determines that leasing is necessary to reduce the risk of
default by a financially troubled hospital.

Sec. 242.73 Waiver of eligibility requirements for mortgage insurance.

The Secretary may insure under this part, without regard to any
limitation upon eligibility contained in this subpart, any mortgage
assigned to him or her in connection with payment under a contract of
mortgage insurance, or executed in connection with a sale by him or her
of any property previously insured under this part and acquired
subsequent to a claim.

Sec. 242.74 Smoke detectors.

Each occupied room must include at least one battery-operated or
hard-wired smoke detector in proper working condition. If the room is
occupied by hearing-impaired persons, the smoke detector must have an
alarm system designed for hearing-impaired persons, unless the smoke
alarm is connected to a central alarm system that is monitored on a 24-
hour basis, or otherwise meets industry standards.

Sec. 242.75 Title requirements.

In order for the mortgaged property to be eligible for insurance,
the Commissioner shall determine that marketable title thereto is
vested in the mortgagor as of the date the mortgage is filed for
record. The title evidence shall be examined by the Commissioner and
the endorsement of the credit instrument for insurance shall be
evidence of its acceptability.

Sec. 242.76 Title evidence.

Upon insurance of the mortgage, the mortgagee shall furnish to the
Commissioner a survey of the mortgage property, satisfactory to the
Commissioner, and a policy of title insurance covering the property, as
provided in paragraph (a) of this section. If, for reasons the
Commissioner considers to be satisfactory, title insurance cannot be
furnished, the mortgagee shall furnish such evidence of title in
accordance with paragraph (b) or (c) of this section as the
Commissioner may require. Any survey, policy of title insurance, or
evidence of title required under this section shall be furnished
without expense to the Commissioner. The types of title evidence are:
(a) A policy of title insurance issued by a company and in a form
satisfactory to the Commissioner. The policy shall name as the insureds
the mortgagee and the Secretary of Housing and Urban Development, as
their respective interests may appear. The policy shall provide that
upon acquisition of title by the mortgagee or the Secretary, it will
continue to provide the same coverage as the original policy, and will
run to the mortgagee or the Secretary, as the case may be.
(b) An abstract of title satisfactory to the Commissioner, prepared
by an abstract company or individual engaged in the business of
preparing abstracts of title, accompanied by a legal opinion
satisfactory to the Commissioner as to the quality of such title,
signed by an attorney-at-law experienced in the examination of titles.
(c) A Torrens or similar title certificate.

Sec. 242.77 Liens.

The hospital must be free and clear of all liens other than the
insured mortgage, except that the property may be subject to a lien as
provided by terms and conditions established by the Commissioner as
follows:
(a) An inferior lien made or held by a Federal, State, or local
government instrumentality;
(b) An inferior lien required in connection with a supplemental
loan insured pursuant to section 241 of the Act;
(c) An inferior or superior lien on equipment as may be approved in
connection with an equipment leasing program approved by the
Commissioner;
(d) An inferior or superior lien on accounts receivable as approved
by the Commissioner as collateral for a line of credit or other
borrowing by a hospital insured under this part that has extraordinary
needs such as cash flow difficulties; or
(e) Similar liens otherwise approved by the Commissioner.

Sec. 242.78 Zoning, deed, and building restrictions.

The project when completed shall not violate any material zoning or
deed restrictions applicable to the project site, and shall comply with
all applicable building and other governmental codes, ordinances,
regulations, and requirements.

Sec. 242.79 Environmental quality determinations and standards.

Requirements set forth in 24 CFR part 50, Protection and
Enhancement of Environmental Quality, 24 CFR part 51, Environmental
Criteria and Standards, and 24 CFR part 55, Implementation of Executive
Order 11988, Flood Plain Management governing environmental review
responsibilities (as applicable) and as otherwise required by the
Commissioner apply to this program.

Sec. 242.81 Lead-based paint poisoning prevention.

Requirements set forth in 24 CFR part 35 apply to this program.

Sec. 242.82 Energy conservation.

Construction, mechanical equipment, and energy and metering
selections shall provide cost-effective energy conservation in
accordance with standards established by the Commissioner.

Sec. 242.83 Debarment and suspension.

The requirements set forth in 24 CFR part 24, except subpart F,
apply to this program.

Sec. 242.84 Previous participation and compliance requirements.

The requirements set forth in 24 CFR part 200, subpart H, apply to
this program.

Sec. 242.86 Property and mortgage assessment.

The requirements set forth in 24 CFR part 200, subpart E, regarding
the mortgagor's responsibility for making those investigations,
analysis, and inspections it deems necessary for protecting its
interests in the property apply to these programs.

Sec. 242.87 Certifications.

Any agreement, undertaking, statement, or certification required by
the Commissioner shall specifically state that it has been made,
presented, and delivered for the purpose of influencing an official
action of the FHA, and of the Commissioner, and may be relied upon by
the Commissioner as a true statement of the facts contained therein.

[[Page 1771]]

Sec. 242.89 Supplemental loans.

A loan, advance of credit, or purchase of an obligation
representing a loan or advance of credit made for the purpose of
financing improvements or additions to a hospital covered by a mortgage
insured under this section of the Act or for a Commissioner-held
mortgage, or equipment for a hospital, may be insured pursuant to the
provisions of section 241 of the Act and under the provisions of this
part as applicable and such additional terms and conditions as
established by the Commissioner. See subpart B of 24 CFR part 241 with
respect to the contract of mortgage insurance for all loans insured
under section 241 of the Act. See 24 CFR part 241, subpart C, for
energy improvements.

Sec. 242.90 Eligibility of mortgages covering hospitals in certain
neighborhoods.

(a) A mortgage financing the repair, rehabilitation, or
construction of a hospital located in an older declining urban area
shall be eligible for insurance under this subpart subject to
compliance with the additional requirements of this section.
(b) The mortgage shall meet all of the requirements of this
subpart, except such requirements (other than those relating to labor
standards and prevailing wages) as are judged to be not applicable on
the basis of the following determinations to be made by the Commissioner.
(1) That the conditions of the area in which the property is
located prevent the application of certain eligibility requirements of
this subpart.
(2) That the area is reasonably viable, and there is a need in the
area for an adequate hospital to serve low and moderate income families.
(3) That the mortgage to be insured is an acceptable risk.
(c) Mortgages complying with the requirements of this section shall
be insured under this subpart pursuant to section 223(e) of the
National Housing Act. Such mortgages shall be insured under and be the
obligation of the Special Risk Insurance Fund.

Sec. 242.91 Eligibility of refinancing transactions.

A mortgage given to refinance an existing insured mortgage under
section 241 or section 242 of the Act covering a hospital may be
insured under this subpart pursuant to section 223(a)(7) of the Act.
Insurance of the new, refinancing mortgage shall be subject to the
following limitations:
(a) Principal amount. The principal amount of the refinancing
mortgage shall not exceed the lesser of:
(1) The original principal amount of the existing insured mortgage,
or
(2) The unpaid principal amount of the existing insured mortgage,
to which may be added loan closing charges associated with the
refinancing mortgage, and costs, as determined by the Commissioner, of
improvements, upgrading, or additions required to be made to the property.
(b) Debt service rate. The monthly debt service payment for the
refinancing mortgage may not exceed the debt service payment charged
for the existing mortgage.
(c) Mortgage term. The term of the new mortgage shall not exceed
the unexpired term of the existing mortgage, except that the new
mortgage may have a term of not more than 12 years in excess of the
unexpired term of the existing mortgage in any case in which the
Commissioner determines that the insurance of the mortgage for an
additional term will inure to the benefit of the FHA Insurance Fund,
taking into consideration the outstanding insurance liability under the
existing insured mortgage, and the remaining economic life of the property.
(d) Minimum loan amount. The mortgagee may not require a minimum
principal amount to be outstanding on the loan secured by the existing
mortgage.

Sec. 242.92 Minimum principal loan amount.

A mortgagee may not require, as a condition of providing a loan
secured by a mortgage insured under this part, that the principal
amount of the mortgage exceed a minimum amount established by the mortgagee.

Sec. 242.93 Amendment of regulations.

The regulations in this subpart may be amended by the Commissioner
at any time and from time to time, in whole or in part, but such
amendment shall not adversely affect the interests of a mortgagee or
lender under the insurance on any mortgage or loan already insured and
shall not adversely affect the interests of a mortgagee or lender on
any mortgage or loan to be insured on which the Commissioner has issued
a commitment to insure.

Sec. 242.94 Cross-reference.

All of the provisions of 24 CFR part 207, subpart B, relating to
mortgages insured under section 207 of the Act, apply to mortgages on
hospitals insured under section 242 of the Act, except Sec. 207.259
(Insurance benefits).

Dated: November 19, 2004.
John C. Weicher,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 05-49 Filed 1-7-05; 8:45 am]
BILLING CODE 4210-27-P

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