DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

FALL 2018 STATEMENT OF REGULATORY PRIORITIES

FOR FISCAL YEAR 2019

Introduction

The Regulatory Plan for the Department of Housing and Urban Development (HUD) for Fiscal Year (FY) 2019 highlights the most significant regulations and policy initiatives that HUD seeks to complete during the upcoming fiscal year. As the Federal agency that serves as the nation's housing agency, HUD is committed to addressing the housing needs of all Americans by creating strong, sustainable, inclusive communities, and quality affordable homes. As a result, HUD plays a significant role in the lives of families and in communities throughout America.

HUD is currently working to develop an innovative approach that anticipates the housing needs of the future while addressing current needs. HUD's 2018-2022 strategic plan focuses on rethinking American communities by refocusing on HUD's core mission and modernizing HUD's approach, leveraging private-sector partnerships, supporting sustainable homeownership, encouraging affordable housing investments, and redesigning HUD's internal processes. HUD's regulatory plan for FY2019 reflects Secretary Carson's strategic plan and HUD's mission.

In addition to the highlighted rule in this plan, Secretary Carson directed HUD, consistent with Executive Order 13771, entitled "Reducing Regulation and Controlling Regulatory Costs," to identify and eliminate or streamline regulations that are wasteful, inefficient or unnecessary. The Secretary has also led HUD's implementation of Executive Order 13777, entitled "Enforcing the Regulatory Reform Agenda." Executive Order 13777 supplements and reaffirms the rulemaking principles of Executive Order 13771 by directing each agency to establish a Regulatory Reform Task Force to evaluate existing regulations to identify those that merit repeal, replacement, or modification; are outdated, unnecessary, or ineffective; eliminate or inhibit job creation; impose costs that exceed benefits; or derive from or implement Executive Orders that have been rescinded or significantly modified. As a result of Secretary's Carson's direction, HUD's Fall 2019 Unified Agenda of Regulatory and Deregulatory Actions lists two anticipated regulatory actions and twelve deregulatory actions.

The rules highlighted in HUD's regulatory plan for FY2019 reflects HUD's efforts to develop innovative approaches that anticipate the housing needs of the future, including the removal or revision of regulations that HUD has determined are outdated, unnecessary, or ineffective.

Streamlining the "Section 3" Requirements for Creating Economic Opportunities for Low- and Very Low-Income Persons and Eligible Businesses: Deregulation

The purpose of Section 3 is to ensure that employment, training, contracting, and other economic opportunities generated by certain HUD financial assistance are directed to low- and very low-income persons, particularly those who are recipients of government assistance for housing, and to businesses that provide economic opportunities to low- and very low-income persons. HUD's current regulations for Section 3 have not been updated in over 20 years. HUD's experience in administering Section 3 over time has provided insight as to how HUD could improve the effectiveness of its Section 3 regulations. Additionally, HUD has heard from the public that there is a need for regulatory changes to clarify and simplify the existing requirements. HUD concluded that regulatory changes are needed to streamline Section 3 and more effectively help recipients of HUD funds achieve the purposes of the Section 3 statute. HUD's proposed rule would update the regulations implementing Section 3 by aligning the reporting with standard business practice; amending the applicability section; updating reporting and adding new outcome benchmarks; and integrating Section 3 into program enforcement.

The new rule generally proposes the tracking and reporting of labor hours, rather than new hires. HUD believes that this is more consistent with the business practices of most HUD recipients, which already track labor hours in their payroll systems because they are subject to prevailing wage rates under the Davis-Bacon Act of 1931, or HUD prevailing wage requirements. A labor-hours frame-work focuses on the outcome that Section 3 requirements are intended to promote, i.e., increasing the amount of paid employment and work experience for low-income persons. Tracking labor hours creates incentives for employers to retain and invest in their low-income workers by removing the opportunity for employers to manipulate HUD's current regulations by hiring the same employee for several short, temporary jobs over the course of a reporting period.

This proposed rule would maintain the statutory scope of applicability while providing separate subparts relating to the different types of funding sources that have associated Section 3 requirements: (1) public housing financial assistance, which covers development assistance provided pursuant to section 5 of the U.S. Housing Act of 1937 (1937 Act) and operating and capital fund assistance provided pursuant to section 9 of the 1937 Act; and (2) Section 3 projects, which covers (a) housing rehabilitation, housing construction and other public construction projects funded with HUD program assistance, when such cumulative assistance to a jurisdiction exceeds a $200,000 threshold; and (b) housing rehabilitation or construction projects that include multiple funding sources, one or more of which is associated with Section 3 requirements. HUD would also update the $200,000 cumulative assistance threshold for Section 3 projects applicability to encompass a narrower scope. HUD believes that this change would reduce the burden on smaller projects.

In addition, HUD's proposed rule would change the process for meeting a safe harbor for compliance with the Section 3 requirements and reporting of Section 3 data. HUD's current regulations provide for a safe harbor where recipients demonstrate compliance with Section 3 by meeting numerical goals for the percentage of their new hires that qualify as Section 3 residents. In addition to hiring Section 3 workers generally, the Section 3 statute directs for recipients of Section 3 covered assistance to target their efforts to provide employment and economic opportunities to specific groups of low-income individuals. HUD's proposed rule would create two "Targeted Section 3 Worker" definitions that would track, according to the type of funding source, the numbers of Section 3 workers who are (a) reported by Section 3 business concerns, or (b) represent the priority categories included in the statute and selected by HUD, i.e., housing project residents. The proposed new rule would also require that recipients report the labor hours performed by Section 3 Workers as a percentage of the total labor hours, and labor hours performed by Targeted Section 3 Workers as a percentage of the total labor hours.

Using the new reporting metrics, HUD would set benchmarks for the safe harbor through Federal Register notice, so HUD can update the metrics in response to additional data. It would also ensure that recipients hire workers from the priority groups, consistent with the statute. As HUD gathers data under the new rule, HUD can more easily revise benchmark figures or tailor different benchmarks for different geographies and different funding types. If a recipient is complying with the statutory priorities and meeting the outcome benchmarks, HUD would presume they are exerting the statutorily prescribed level of effort. Otherwise, the recipients would be required to submit qualitative reports on their efforts, as they are required to do under the current rule when they do not meet the safe harbor, and HUD may do more in-depth compliance reviews. PHAs with fewer than 250 units would only be required to report on Section 3 qualitative efforts and would not be required to report on whether they have met the reporting benchmarks.

Lastly, HUD's proposal would provide that program staff would incorporate Section 3 compliance and oversight into regular program oversight and make Section 3 a more integral part of the program office's work. As a result, this proposed rule would streamline the extensive complaint and compliance review procedures in the current rule. Relatedly, it would remove the delegation of authority in the current regulations, as Section 3 requirements, reporting, and compliance activities would be aligned with those of the applicable HUD program office or offices.

HUD envisions this rule being completed in FY 2019.

Aggregate Costs and Benefits

Executive Order 12866, as amended, requires the agency to provide its best estimate of the combined aggregate costs and benefits of all regulations included in the agency's Regulatory Plan that will be pursued in FY 2019. HUD expects that the neither the total economic costs nor the total efficiency gains will exceed $100 million.

Project Approval for Single- Family Condominiums

This rule would codify HUD's program to approve condominium projects for FHA insurance pursuant to 12 U.S.C. 1707(a), as amended by section 2117 of the Housing and Economic Recovery Act of 2008 (HERA), which defines a mortgage eligible for FHA insurance as a first lien on a one-family unit along with an undivided interest in the common areas and facilities which serve the project. This codification would make current requirements for the program less strict and prescriptive, giving the condominium industry greater flexibility.

The FHA Condominium program is currently administered under the Condominium Approval and Processing Guide (the Guide). The Guide has a number of "bright line" requirements. This final rule would, on the other hand, establish more flexible and less costly requirements. The rule retains those requirements that are necessary to fulfill HUD's duty to avoid excessive risk to the insurance fund but does so in a less prescriptive way. This should result in increasing FHA participation in the condominium market and make condominiums more widely available. Condominium units are a valuable source of homeownership for moderate and lower-income families.

To provide for flexibility the rule would remove strict numeric requirements in favor of provisions that permit HUD to act within ranges. Specifically, where the Guide currently has strict numerical requirements regarding the allowable percentage of FHA-insured projects, the percentage of owner occupants, and the amount of space that can be used for commercial or nonresidential purposes, the final rule would make these percentages flexible and efficient to change, so that HUD can adjust to changing market conditions. HUD anticipates providing for the ability to change these threshold percentages by notice, rather than regulation, the rule would allow HUD to quickly adjust these percentages to be responsive to the market. There is also a provision for HUD to grant exceptions to these percentages on a case-by-case basis, considering factors relating to the economy for the locality in which the project is located or specific to the project. The percentage range limits themselves may be changed by publishing a notice for a brief period of public comment.

The final rule would also allow for single units to be approved for mortgage insurance outside of the project approval process. Unlike the Guide that does not provide a provision for insuring mortgages on units other than in an approved project, this rule recognizes that there may be situations where a project may not be approved, not because of any significant inherent problem with the project that creates risk to the insurance fund (e.g., the Homeowners' Association does not want to go to the expense of applying for approval). In such cases, the rule would allow for a percentage of single units to be approved for mortgage insurance outside of the project approval process, under certain guidelines designed to reduce unacceptable risk to the insurance fund.

The rule would institute front-end standards for mortgagees to qualify to participate as Direct Endorsement lenders in the DELRAP, or Direct Endorsement Review and Approval Program. Once qualified, these lenders have the ability to review and approve condominium loans, with HUD having the authority to intervene in the case of misconduct or unacceptable performance. Ensuring that Direct Endorsement mortgagees have staff members with relevant condominium experience helps to mitigate risks to the insurance fund.

Aggregate Costs and Benefits

Executive Order 12866, as amended, requires the agency to provide its best estimate of the combined aggregate costs and benefits of all regulations included in the agency's Regulatory Plan that will be pursued in FY 2018. HUD expects that the neither the total economic costs nor the total efficiency gains will exceed $100 million.

Affirmatively Furthering Fair Housing: Streamlining and Enhancements

On July 16, 2015, HUD published in the Federal Register its Affirmatively Furthering Fair Housing (AFFH) final rule. The goal of the regulation was to provide HUD program participants with a revised planning approach to assist them in meeting their statutory obligation to affirmatively further the purposes and policies of the Fair Housing Act. The principal AFFH regulations are codified in 24 CFR part 5, subpart A, with other AFFH related regulations codified in 24 CFR parts 91, 92, 570, 574, 576, and 903. HUD is committed to its mission of achieving fair housing opportunity for all, regardless of race, color, religion, national origin, sex, disability, or familial status. However, HUD's experience over the three years since the newly-specified approach was promulgated demonstrates that the rule is not fulfilling its purpose to be an efficient means for guiding meaningful action by program participants.

Under the AFFH rule, HUD program participants are required to use an Assessment Tool to conduct and submit an Assessment of Fair Housing (AFH) to HUD. Because of the variations in the HUD program participants subject to the AFFH rule, HUD went through a process to develop three separate assessment tools: one for local governments, one for public housing agencies, and one for States and Insular Areas. Due to varying technical and other issues, only the Assessment Tool for local governments was ever made available for use. However, HUD withdrew the Local Government Assessment Tool in a Federal Register notice published on May 23, 2018 as a result of its review of the initial round of AFH submissions that were developed using the tool. This review led HUD to conclude that the tool was unworkable based upon: (1) the high failure rate from the initial round of submissions; and (2) the level of technical assistance HUD provided to this initial round of 49 AFHs, which cannot be scaled up to accommodate the increase in the number of local government program participants with AFH submission deadlines in 2018 and 2019.

On May 15, 2017, HUD published a Federal Register notice consistent with Executive Orders 13771, "Reducing Regulation and Controlling Regulatory Costs," and 13777, "Enforcing the Regulatory Reform Agenda," inviting public comments to assist HUD in identifying existing regulations that may be outdated, ineffective, or excessively burdensome. HUD received 299 comments in response to the Notice, and 136 (45% of the total) discussed the AFFH rule. Most of these comments were critical of the AFFH rule and cited its complexity and the costs associated with completing an AFH.

As HUD begins the process of developing a new proposed rule, HUD issued an advance notice of proposed rulemaking (ANPR) on August 16, 2018, at 83 FR 40713, which invites public comment on amendments to the AFFH regulations. HUD is also reviewing comments submitted in response to the withdrawal of the Local Government Assessment Tool and will consider those comments during HUD's consideration of potential changes to the AFFH regulations. HUD will use these sets of comments in drafting future rulemaking.

Aggregate Costs and Benefits

Executive Order 12866, as amended, requires the agency to provide its best estimate of the combined aggregate costs and benefits of all regulations included in the agency's Regulatory Plan that will be pursued in FY 2018. At this pre-rule stage, HUD expects that the neither the total economic costs nor the total efficiency gains will exceed $100 million.