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FEDERAL HOUSING FINANCE number for the Telecommunications (iv) The amount of investments and AGENCY Device for the Hearing Impaired is (800) grants by the Enterprise in projects 877–8339. which assist in meeting the needs of the 12 CFR Part 1282 SUPPLEMENTARY INFORMATION: underserved markets (hereafter, the ‘‘investments and grants evaluation RIN 2590–AA27 I. Background area’’).5 Enterprise Duty To Serve Underserved A. Statutory Background The Duty to Serve provisions and Markets issues considered are discussed further The Safety and Soundness Act below. AGENCY: Federal Housing Finance provides generally that the Enterprises B. Conservatorship Agency. ‘‘have an affirmative obligation to On September 6, 2008 the Director of ACTION: Final rule. facilitate the financing of affordable housing for low- and moderate-income FHFA appointed FHFA as conservator SUMMARY: The Housing and Economic families.’’ 1 Section 1129 of HERA of the Enterprises in accordance with Recovery Act of 2008 (HERA) amended amended section 1335 of the Safety and the Safety and Soundness Act to the Federal Housing Enterprises Soundness Act to establish a duty for maintain the Enterprises in a safe and Financial Safety and Soundness Act of the Enterprises to serve three specified sound financial condition and to help 1992 (Safety and Soundness Act) to underserved markets, to increase the assure performance of their public establish a duty for the Federal National liquidity of mortgage investments and mission. Since the establishment of Mortgage Association (Fannie Mae) and improve the distribution of investment FHFA as conservator, the Enterprises the Federal Home Loan Mortgage capital available for mortgage financing have returned to profitability. The U.S. Corporation (Freddie Mac) (collectively, for certain categories of borrowers in Department of the Treasury (Treasury the Enterprises) to serve three specified those markets.2 Specifically, the Department) has provided essential underserved markets—manufactured Enterprises are required to provide financial commitments of taxpayer housing, affordable housing leadership in developing loan products funding under Senior Preferred Stock preservation, and rural markets—in and flexible underwriting guidelines to Purchase Agreements (PSPAs). Fannie order to increase the liquidity of facilitate a secondary market for Mae and Freddie Mac have drawn a mortgage investments and improve the mortgages on housing for very low-, combined total of $187.5 billion in distribution of investment capital low-, and moderate-income families for taxpayer support under the PSPAs to available for mortgage financing for very manufactured housing, affordable date. Through September 30, 2016, the low-, low-, and moderate-income housing preservation, and rural Enterprises have paid the Treasury families in those markets. The Federal markets.3 In addition, section 1335(d)(1) Department a total of $250.5 billion in Housing Finance Agency (FHFA) is requires FHFA to establish, by dividends on senior preferred stock. issuing this final rule which specifies regulation, a method for evaluating and Under the provisions of the PSPAs, the the scope of Enterprise activities that are rating the Enterprises’ compliance with Enterprises’ dividend payments do not eligible to receive Duty to Serve credit. the Duty to Serve underserved markets.4 offset the amounts drawn from the These activities generally are those that FHFA is required to separately evaluate Treasury Department. facilitate a secondary market for each Enterprise’s compliance with While the Enterprises are in mortgages related to: Manufactured respect to each underserved market, conservatorships, all of their activities homes titled as real property or personal taking into consideration the following: are subject to FHFA review and property; blanket loans for certain (i) The Enterprise’s development of approval. FHFA has delegated day-to- categories of manufactured housing loan products, more flexible day management of the Enterprises to communities; preserving the underwriting guidelines, and other their senior management and boards of affordability of housing for renters and innovative approaches to providing directors. In managing the homebuyers; and housing in rural financing to each of the underserved conservatorships, FHFA sets the markets. The final rule provides a markets (hereafter, the ‘‘loan product strategic direction of the Enterprises, framework for FHFA’s method for evaluation area’’); approves Enterprise actions as deemed evaluating and rating the Enterprises’ (ii) The extent of the Enterprise’s appropriate by FHFA, and oversees and compliance with the Duty to Serve each outreach to qualified loan sellers and monitors Enterprise activities. underserved market. other market participants in each of the The law also requires and FHFA expects the Enterprises to continue to DATES: The final rule is effective January underserved markets (hereafter, the ‘‘outreach evaluation area’’); fulfill their core statutory purposes 30, 2017. while they are in conservatorship, FOR FURTHER INFORMATION CONTACT: Jim (iii) The volume of loans purchased by the Enterprise in each underserved which include their support for Gray, Manager, Office of Housing and affordable housing and underserved Community Investment, (202) 649– market relative to the market opportunities available to the markets. Consistent with the 3124; Matt Douglas, Senior Policy conservatorships, Enterprise support for Analyst, Office of Housing and Enterprise, except that the Director shall not establish specific quantitative affordable housing and underserved Community Investment, (202) 649– markets must be accomplished within 3328; Miriam Smolen, Associate targets or evaluate the Enterprise based solely on the volume of loans purchased the confines of safety and soundness General Counsel, Office of General and the goals of conservatorship. Counsel, (202) 649–3182; or Sharon (hereafter, the ‘‘loan purchase Like, Managing Associate General evaluation area’’); and C. Regulatory History Counsel, Office of General Counsel, Prior to issuing this final rule, FHFA (202) 649–3057. These are not toll-free 1 12 U.S.C. 4501(7). engaged in a number of rulemaking 2 numbers. The mailing address for each 12 U.S.C. 4565. activities to establish its regulatory 3 12 U.S.C. 4565(a). The terms ‘‘very low- contact is: Federal Housing Finance income,’’ ‘‘low-income,’’ and ‘‘moderate-income’’ expectations for the Enterprises’ Duty to Agency, 400 7th Street SW., are defined in 12 U.S.C. 4502. Washington, DC 20219. The telephone 4 12 U.S.C. 4565(d)(1). 5 12 U.S.C. 4565(d)(2).

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Serve obligations and FHFA’s organizations, and lender, builder and • On April 20, 2016, FHFA met with evaluation process for those activities. energy efficiency trade organizations; advocates for consumers, civil rights, These prior regulatory actions are • Nonprofit lenders and developers, energy efficiency, and affordable described below. including loan funds, land trusts, housing to discuss manufactured community development financial housing, energy efficiency, Low-Income 1. Advance Notice of Proposed institutions, intermediaries, and Housing Tax Credits, and other Rulemaking organizations focused on preservation strategies to preserve affordable Rulemaking for the Duty to Serve and energy conservation; housing. commenced in August 2009 with • Policy and housing advocacy • On April 25, 2016, FHFA met with FHFA’s publication in the Federal organizations, including civil rights organizations representing the mortgage Register of an Advance Notice of organizations, fair housing finance and insurance industries to Proposed Rulemaking (ANPR) on the organizations, and national and state discuss gaps in underserved market Enterprise Duty to Serve underserved consumer law organizations; segments that are within acceptable • markets.6 FHFA received 100 comment Commercial enterprises including credit risk tolerances for lenders, letters in response to the ANPR. Low-Income Housing Tax Credit insurance companies, and investors, investors, manufactured housing 2. 2010 Duty To Serve Proposed Rule and other related issues. construction companies and developers, • On April 26, 2016, FHFA met with After reviewing the comment letters and energy efficiency companies; • organizations representing on the ANPR, FHFA published in the Government entities, including manufactured housing industry Federal Register on June 7, 2010 a federal, state, and local government participants to discuss tenant proposed rule on the Duty to Serve.7 entities and state and local housing protections in manufactured housing The 45-day public comment period for finance agencies; • communities, manufactured housing the proposed rule closed on July 22, Members of Congress; • Academicians, including university units titled as real estate or personal 2010. FHFA received 4,019 comments property, and other related issues. on the proposed rule. Commenters professors; and • • Fannie Mae and Freddie Mac. On May 2, 2016, FHFA held a included individuals, trade associations, A number of commenters addressed conference call with rural housing policy and housing advocacy groups, one or more of the 79 specific requests stakeholders who were unable to nonprofit organizations, corporations, for comment posed in the participate in the April 19 meeting government entities, management SUPPLEMENTARY INFORMATION to the described above. companies, homeowners’ associations, proposed rule. Responses to the II. Duty To Serve Underserved Markets developers, lenders, a legal services questions came from a diversity of group, Members of Congress, and both stakeholders reflecting a wide range of A. Implementing the Duty To Serve Enterprises. No final Duty to Serve rule opinions. FHFA appreciates the efforts The final rule implements the was issued after the close of the made by commenters to respond to the Enterprises’ statutory Duty to Serve very comment period in 2010. questions, and FHFA considered these low-, low-, and moderate-income 3. 2015 Duty To Serve Proposed Rule comments in developing the final rule. families in the underserved markets of Some questions were answered by a FHFA began work to develop a new manufactured housing, affordable large number of commenters, while Duty to Serve proposed rule in 2014, housing preservation, and rural housing. other questions were not addressed by taking into consideration the comments In doing so, the final rule creates two commenters at all. Some commenters received on the 2010 Duty to Serve complementary processes for the offered a single answer to multiple proposed rule and subsequent input Enterprises to plan for their Duty to questions. As a result, FHFA has Serve activities and for FHFA to from diverse stakeholder groups. The incorporated applicable responses to the comments and input received and annually evaluate each Enterprise’s questions into the discussion below of compliance with its Duty to Serve FHFA’s intervening years of experience comments on particular issues. with the Enterprises and their obligations. Under the final rule, each FHFA also held five roundtable Enterprise must prepare an Underserved operations in the underserved markets discussions with commenters suggested a different approach, Markets Plan (Plan) describing the representing a diversity of interests on specific activities and objectives it will sufficiently so that further notice and issues pertaining to the rulemaking.9 comment was necessary through undertake to fulfill its Duty to Serve The purpose of the roundtable obligations in each underserved market issuance of a new proposed rule. discussions was to provide the Accordingly, FHFA published in the over a three-year period. The Plan commenters with an opportunity to process as outlined in the final rule does Federal Register on December 18, 2015 elaborate on their comment letters, a second proposed rule on the not make any specific activity express their views on the comment mandatory. Instead, the final rule Enterprises’ Duty to Serve letters submitted by others, and provide 8 establishes a set of procedures for the requirements. The 90-day public responses to FHFA questions seeking comment period for the proposed rule Enterprises to consider a range of clarifications on their comment letters. activities for inclusion in their Plans closed on March 17, 2016. Each roundtable discussion focused on FHFA received 1,567 comments on and incentives for the Enterprises to specific groups of stakeholders: include impactful activities in their the 2015 proposed rule, including from • On April 19, 2016, FHFA met with the following stakeholder groups: Plans. In addition to the provisions • rural housing stakeholders to discuss described in the final rule, and in order Individuals, including owners of how the term ‘‘rural area’’ should be manufactured homes; to address implementation and • defined, high-needs rural areas, and operational questions that may arise, Trade associations, including other related issues. manufactured housing trade FHFA intends to release guidance from time to time as the Enterprises develop 9 Summaries of each of these meetings are 6 See 74 FR 38572 (Aug. 4, 2009). available on FHFA’s Web site at: https:// and execute their Plans. 7 See 75 FR 32099 (June 7, 2010). www.fhfa.gov/SupervisionRegulation/Rules/Pages/ The final rule also establishes an 8 See 80 FR 79181 (Dec. 18, 2015). Comment-List.aspx?RuleID=543. evaluation and ratings process for FHFA

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to assess the Enterprises’ performance in In the final rule, FHFA has undertake to meet their Duty to Serve fulfilling their Plans in each established parameters for Enterprise each underserved market. underserved market. As part of this Plans and the following aspects are Many commenters discussed the process, FHFA will prepare Evaluation described below: (1) Requirement that appropriateness of the proposed three- Guidance which, together with the the Plans have a three-year term; (2) year term for the Plans, with the large Enterprises’ Plans, will be the basis for definitions of those activities eligible to majority supporting three years. A trade FHFA’s evaluations and ratings. The include in Enterprise Plans; (3) association commented that compliance public will have an opportunity to requirement that the Enterprises with a requirement to submit Plans provide input on each Enterprise’s draft designate Plan activities for each every three years would be burdensome Plan as well as FHFA’s draft Evaluation underserved market; (4) requirement for the Enterprises. Freddie Mac stated Guidance. FHFA will annually assign that the Enterprises designate Plan that reliably projecting activities and each Enterprise a rating for each of the objectives for each activity and also benchmarks beyond the first year of the three underserved markets in its Plan, specify the evaluation area for each Plan Plan would be challenging due to and FHFA will publicly report on its objective; (5) submission and review of changes in market conditions, lessons basis for assigning each rating. As part Enterprise Plans; (6) modification of learned, and market opportunities, and of these annual evaluations, FHFA will Enterprise Plans; and (7) the process for recommended that FHFA permit annual also monitor the Enterprises’ Duty to approving new products. updates to the Plans. FHFA has Serve activities on an ongoing basis. determined that three-year cycles are an 1. Requirement for Underserved Markets All activities that an Enterprise appropriate period of time for the Plans With Three-Year Terms— undertakes in furtherance of its Duty to Enterprises to be able to accomplish § 1282.32(a), (b) Serve must be consistent with its charter multiyear objectives and that it is act,10 as well as with all other Consistent with the proposed rule, feasible for the Enterprises to forecast applicable federal and state laws. § 1282.32(a) and (b) of the final rule activities and market conditions for Plan Nothing in the final rule authorizes or provides that each Enterprise must purposes. In addition, as discussed requires an Enterprise to engage in any prepare a Plan describing the specific below, the Enterprises will be permitted activity that would be otherwise activities and objectives it will to annually modify their Plans during inconsistent with its charter or the undertake to fulfill its Duty to Serve the three-year cycle,, subject to FHFA Safety and Soundness Act, or prohibits obligations in each underserved market Non-Objection. an Enterprise from engaging in any over a three-year period. As discussed 2. Eligible Activities for Underserved activity. Rather, the final rule specifies further below, objectives are the specific Markets—§§ 1282.33(b), 1282.34(b), the scope of Enterprise activities that are action items that the Enterprises will 1282.35(b), 1282.36(c)(3) eligible to receive Duty to Serve credit, identify for each activity. The Plan, and provides a framework for evaluating along with Evaluation Guidance to be The final rule defines the scope of the Enterprises’ performance. provided by FHFA, will be the basis for eligible activities that an Enterprise may Consistent with safety and soundness FHFA’s evaluation of each Enterprise’s include in a Plan as those that facilitate and consistent with the Duty to Serve performance. The a secondary mortgage market on conservatorships, FHFA expects the Evaluation Guidance is discussed residential properties for very low-, Enterprises to show tangible results in further below under § 1282.36. low-, and moderate-income families, each underserved market and to Numerous commenters, including consisting of: (1) Manufactured homes effectively facilitate mortgage lending to both Enterprises, supported the use of titled as real property or personal very low-, low-, and moderate-income Plans, which commenters stated is a property and manufactured housing families in each underserved market. reasonable way for the Enterprises to communities; (2) affordable rental Consistent with their charters, the describe their planned activities and housing preservation and affordable Enterprises should expect mortgage objectives and for FHFA to evaluate homeownership preservation; and (3) purchases and activities pursuant to the Enterprise performance. Fannie Mae rental housing and homeownership Duty to Serve to earn a reasonable recommended that the Plans be housing in rural areas. See economic return, which may be less simplified to align more closely with the §§ 1282.33(b), 1282.34(b), 1282.35(b), than the return earned on activities that requirements of other federal regulators and 1282.36(c)(3). In a change from the do not serve these underserved for Community Reinvestment Act (CRA) proposed rule, the scope of eligible markets.11 Strategic Plans. Fannie Mae stated that activities in the final rule includes B. Underserved Markets Plans such simplified Plans would require manufactured homes titled as personal property, which is discussed in greater The below section sets out the final fewer Enterprise resources to develop, detail below in Section C(1): rule’s requirements for each Enterprise thereby enabling the Enterprises to Manufactured Housing. to submit a Plan that will describe the devote more of their resources to Section 1282.36(c)(3) of the final rule activities and objectives the Enterprise engaging in activities in the underserved also provides for extra credit-eligible will undertake for Duty to Serve credit. markets. Freddie Mac also commented activities, including those that promote Each Enterprise must not only describe on the level of detail required in the residential economic diversity. in its Plan the activities it intends to Plans and recommended that FHFA engage in, but also why it decided not permit the Enterprises to update their 3. Underserved Markets Plan to include certain other activities in its Plans annually in order to address Activities—§§ 1282.32(d); 1282.33(c), Plan. changes. (d); 1282.34(c), (d); 1282.35(c), (d); FHFA has considered the feedback 1282.36(c)(3) 10 See Federal National Mortgage Association from commenters and has determined Charter Act sec. 301, 12 U.S.C. 1716, et seq., and that such Plans should be required in a. Statutory, Regulatory, and Additional Federal Home Loan Mortgage Corporation Act sec. the final rule. Accordingly, § 1282.32(a) Activities 301, 12 U.S.C. 1451 note, et seq. The Enterprises’ public purposes include a broad obligation to serve of the final rule requires the Enterprises Consistent with the proposed rule, lower- and moderate-income borrowers. to develop Plans describing the specific § 1282.32 of the final rule retains the 11 See 12 U.S.C. 4513(a)(1)(B)(ii). activities and objectives they will requirement that each Enterprise’s Plan

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describe all activities that the Enterprise may include, for example, activities that include in a Plan, an Enterprise would will undertake for Duty to Serve credit, support other federal, state, and local have to provide evidence that the with the activities grouped under the programs not specifically enumerated in activity would provide a benefit following categories, as applicable: the final rule that would benefit from comparable to how affordable housing is • Statutory Activities—Activities that Enterprise support. Any Additional preserved in the Regulatory Activities assist affordable housing projects under Activities must be eligible under one of relating to energy efficiency. the eight affordable housing programs the three specified underserved markets FHFA will also take into specifically enumerated in the Safety as defined in this final rule. If an consideration how different the and Soundness Act and any comparable Enterprise chooses to include an proposed Additional Activity is from state and local affordable housing Additional Activity in its Plan, the the other Duty to Serve Statutory and programs (a category that is also Enterprise must provide sufficient Regulatory Activities. Additional specified in the Safety and Soundness explanation in its Plan of how the Activities that are very similar to a Act); Statutory and Regulatory Activity will • Regulatory Activities—Activities in Additional Activity will target an be subject to higher levels of scrutiny, the underserved markets that are underserved segment of the market. In recognizing that the protections designated as Regulatory Activities in addition, an Enterprise must describe embedded in those activities have been the final rule; and how the Additional Activity ensures • Additional Activities—Other that there are adequate levels of either statutorily enumerated by activities identified by an Enterprise in consumer protections or benefits to the Congress, or have been subject to the its Plan that are determined by FHFA to tenants or homeowners that are public comment process in the be eligible for that underserved market. consistent with the requirements of proposed Duty to Serve rule, FHFA invites the Enterprises to other Statutory and Regulatory respectively and considered by FHFA. include Additional Activities in their Activities in the rule. As an example, for The table below shows the Statutory Plans for FHFA’s review and an Additional Activity that pertains to and Regulatory Activities for each of the consideration. Additional Activities energy efficiency to be eligible to three underserved markets.

Underserved markets Activities Manufactured housing Affordable housing preservation Rural areas

Statutorily-Enumer- None ...... 1. Section 8 programs ...... None. ated Activities. 2. Section 236 (rental and cooperative housing program). 3. Section 221(d)(4) (moderate-income and displaced families). 4. Section 202 (elderly) ...... 5. Section 811 (persons with disabil- ities). 6. Permanent supportive housing projects (homeless assistance). 7. Section 515 (rural rental) ...... 8. Low-Income Housing Tax Credits (LIHTCs). 9. Comparable state and local afford- able housing programs. Regulatory Activities 1. Support manufactured homes titled 1. Support small multifamily rental 1. Support housing in high-needs rural as real property. property financing activity. regions: 2. Support manufactured homes titled 2. Support financing of multifamily en- • Middle Appalachia. as personal property. ergy efficiency improvements. • The Lower Mississippi Delta. 3. Support manufactured housing com- 3. Support financing of single-family • Colonias. munities owned by government in- energy efficiency improvements. • Rural tracts in persistent pov- strumentalities, nonprofits, or resi- 4. Support affordable homeownership erty counties. dents. preservation (shared equity) financ- 2. Support housing for high-needs 4. Manufactured housing communities ing. rural populations: with specified minimum tenant pad 5. Support HUD’s Choice Neighbor- • Native Americans in Indian lease protections. hoods Initiative (CNI). areas. 6. Support HUD’s Rental Assistance • Agricultural workers. Demonstration (RAD) Program. 3. Support financing by small financial 7. Support financing of purchase or re- institutions of rural housing. habilitation of distressed properties. 4. Support rural small multifamily rental property activity.

Because the goal of the Duty to Serve income categories in each year in which designated in the Evaluation Guidance, statute is to increase the amount of the Enterprise is evaluated and rated. including those activities that reduce investment capital available for Any one activity may, but need not, the economic isolation of very low-, mortgage financing for very low-, low-, serve more than one of the three income low-, and moderate-income households and moderate-income households, categories. by promoting residential economic diversity, will be eligible for Duty to §§ 1282.32(a), 1282.33(a), 1282.34(a), b. Extra Credit-Eligible Activities 1282.35(a) of the final rule require the Serve extra credit. Plans to include activities in each Section 1282.36(c)(3) of the final rule FHFA received comments from a underserved market that serve all three provides that certain activities wide range of commenters who

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recommended providing extra credit for Statutory or Regulatory Activities, the objectives included in an Enterprise’s a diverse set of activities. Extra credit- proposed rule appeared to be intended Plan, as well as the nature of those eligible activities, including residential to guide the Enterprises towards certain activities, to determine whether the economic diversity activities, are not Activities. Freddie Mac also raised the number is reasonable and achievable, mandatory. However, in order to be concern that it might not be possible to and the degree of potential impact on eligible to for extra credit, the create or sustain a secondary mortgage the underserved markets. Enterprises must include and describe market in certain submarkets. Fannie the designated activities and objectives Mae stated that the proposed approach 4. Underserved Markets Plan Objectives in their Plans. Extra credit-eligible could be simplified and made more cost for Each Activity—§ 1282.32(e), activities, including residential effective. Both Enterprises commented 1282.32(f) economic diversity activities, are on the importance of having discretion Consistent with the proposed rule, discussed further below under and flexibility to propose suitable § 1282.32(e) of the final rule provides § 1282.36(c)(3). activities for the underserved markets. that for each activity set forth in a Plan, After considering the comments, the Plan must include one or more c. Consideration of Minimum Number FHFA has determined in § 1282.32(d)(1) of Activities objectives, which are the specific action of the final rule that it will state in the items that the Enterprises will identify This final rule does not require the Evaluation Guidance a minimum for each activity. Objectives are central Enterprises to engage in any particular number of Statutory or Regulatory to FHFA’s Duty to Serve evaluation activity for Duty to Serve credit. Activities that the Enterprises must process and ratings determinations. However, the final rule does require that consider and address in their Plans, Objectives may cover a single year or the Enterprises consider a certain leaving to the Enterprises the decision multiple years. Each objective must number of activities and explain why on which specific Statutory or meet all of the following requirements: they are either included in their Plans Regulatory Activities to consider and • Strategic. Directly or indirectly or why they have chosen not to include address under this requirement. This maintain or increase liquidity to an them in their Plans. Section approach balances the comments underserved market; 1282.32(d)(1) of the final rule provides recommending that FHFA guide the • Measurable. Provide measurable that FHFA will designate in the scope of activities and maintain benchmarks, which may include Evaluation Guidance a minimum accountability for the statutorily- numerical targets, that enable FHFA to number of Statutory Activities or enumerated programs with the determine whether the Enterprise has Regulatory Activities that the feasibility concerns of the Enterprises. achieved the objective; Enterprises must consider for each In addition, because the Enterprises’ • Realistic. Calibrated so that the underserved market. For example, if capacity to address the Statutory and Enterprise has a reasonable chance of FHFA decides that the Enterprises must Regulatory Activities may change over meeting the objective with appropriate consider at least three Statutory or time, providing flexibility for FHFA to effort; Regulatory Activities for a given market, specify in the Evaluation Guidance the • Time-bound. Subject to a specific each Enterprise would be required to minimum number of such activities to timeframe for completion by being tied select any three Statutory or Regulatory be considered and addressed in the to Plan calendar year evaluation Activities and explain in its proposed Plans will enable FHFA to change the periods; and Plan whether it will engage in these minimum number each Plan cycle as • activities, and if not, why not. This is a appropriate. The statutory programs in Tied to analysis of market change from the proposed rule, which § 1282.34(c)(5) and (c)(6) are excluded opportunities. Based on assessments would have required the Enterprises to for this purpose because they do not, at and analyses of market opportunities in consider, and include explanations in this time, lend themselves to Enterprise each underserved market, taking into their Plans for, every Statutory and support, so FHFA does not expect the account safety and soundness Regulatory Activity specified in the Enterprises to address these two considerations. rule.12 programs in their Plans. A number of policy advocacy Several policy advocacy organizations organizations and nonprofit lenders d. Activities and Objectives To Be supported FHFA’s proposed approach supported the proposed approach that Undertaken the Enterprises be required to consider for the objectives. A policy advocacy and address every Statutory and Section 1282.32(d)(1) and (2) of the organization and a nonprofit Regulatory Activity in their Plans. Some final rule provides that for all Statutory, organization suggested regulatory commenters reasoned that the proposed Regulatory, and Additional Activities language changes that it stated would approach would maintain that an Enterprise chooses to undertake enhance the specificity of the accountability for the programs in its Plan, the Enterprise must address Enterprise’s objectives, strengthen the enumerated in the statute, while at the in its Plan how it will undertake the ability of the public and FHFA to assess same time provide the Enterprises the activities and related objectives, which compliance with the Enterprise’s stated flexibility to decide which activities to are discussed further below. Section objectives, and measure their impact. undertake. A few commenters who 1282.32(d)(3) provides that if an FHFA believes that such changes are not advocated for the consideration of every Enterprise chooses to undertake an necessary as the Evaluation Guidance Statutory or Regulatory Activity in a activity, such as a residential economic will contain sufficient information Plan also supported providing the diversity activity, for extra credit under regarding the process for developing the Enterprises with broad discretion in § 1282.36(c)(3), the Enterprise must Plans. describe the activity and related deciding how to serve the underserved Statutory Evaluation Areas markets. objectives in its Plan. Freddie Mac commented that by The Enterprises may include as many As proposed, § 1282.32(f) of the final FHFA designating certain activities as Statutory, Regulatory, and Additional rule provides that each Plan objective Activities and related objectives in their must incorporate one or more of the 12 The proposed rule referred to the Statutory and Plans as they consider feasible. FHFA following four statutory evaluation areas Regulatory Activities as ‘‘Core’’ Activities. will review the number of activities and (referred to as ‘‘assessment factors’’ in

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the proposed rule), which are set forth Although the final rule does not development activities are robust, the in § 1282.36(b) of the final rule: establish quantitative targets, FHFA will data collected and findings are shared • Outreach. The outreach evaluation consider the Enterprise’s past with industry stakeholders, and the area requires evaluation of ‘‘the extent performance on the volume of loans research and development activities of outreach [by the Enterprises] to purchased in a particular underserved mesh with already well-developed qualified loan sellers and other market market relative to the volume of loans concepts that have the potential to reach participants’’ in each of the three the Enterprise actually purchases in that the market within a short period of time. underserved markets.13 A Plan objective underserved market in a given year After considering the comments, could describe how an Enterprise would pursuant to its Plan. In reviewing the FHFA has determined that it is engage market participants, such as Plan and the loan purchase evaluation reasonable to make Enterprise research through conducting meetings and area, FHFA will take into account and development activities eligible for conferences with current and difficulties in forecasting future Duty to Serve credit under the loan prospective seller/servicers and performance and the need for flexibility product or outreach evaluation areas providing technical support to seller/ in dealing with unexpected market because of their importance in changes. encouraging innovation and creative servicers, in order to accomplish a Plan • activity. Market participants could Investments and Grants. The solutions to the challenges that exist in include traditional participants in investments and grants evaluation area the underserved markets. requires evaluation of ‘‘the amount of Enterprise programs, as well as non- Requirement of a Single Evaluation Area investments and grants in projects traditional participants such as for Each Objective consortia sponsored by banks, nonprofit which assist in meeting the needs of 17 Section 1282.32(f) of the final rule organizations, real estate developers, such underserved markets.’’ A Plan objective could include investments. As provides that an Enterprise must and state and local governments. designate in its Plan the evaluation area • with all activities, the investments must Loan Product. The loan product comply with the Enterprises’ Charter under which each Plan Objective will be evaluation area requires evaluation of an Acts.18 FHFA has directed the evaluated. Enterprise’s ‘‘development of loan Enterprises to refrain from making Under the proposed rule, an objective products, more flexible underwriting grants because they are in would have been eligible to receive guidelines, and other innovative conservatorship. Accordingly, during Duty to Serve credit under only one approaches to providing financing to evaluation area in each underserved 14 the period of conservatorship, FHFA each’’ underserved market. A Plan does not intend to provide Duty to Serve market for each year. Both Enterprises objective could describe, for example, credit to the Enterprises for making objected to this proposed requirement, how the Enterprise will reevaluate its grants. stating that Duty to Serve credit should underwriting guidelines, which could FHFA received a number of be available under multiple evaluation include empirical testing of different comments on the four evaluation areas. areas within an underserved market. parameters and modification of loan The two evaluation areas that received Fannie Mae argued that Plan activities, products in an effort to increase the the most comments were loan products, regardless of which evaluation area they availability of loans to families targeted and grants and investments. For the are in, are intertwined with achieving by the Duty to Serve, consistent with loan products evaluation area, the end result of better serving an safe and sound lending practices. FHFA commenters offered suggestions for underserved market. Freddie Mac expects the Enterprise to identify and specific pilots and for enhancing the argued that the proposed requirement assess current underwriting guidelines criteria to use when assessing loan would undercount Enterprise support that may impede service to very low-, product activities. Commenters for activities that meet multiple low-, and moderate-income families in generally expressed support for the evaluation areas within a particular the underserved markets. development of new loan products. The market and could result in imprecise or • Loan Purchase. The loan purchase commenters were nearly unanimous in arbitrary classification of the evaluation area requires FHFA to expressing their support for the Enterprises’ activities or objectives. consider ‘‘the volume of loans Enterprises to be allowed to receive After considering the comments, purchased in each of such underserved Duty to Serve credit for investments and FHFA has determined in the final rule markets relative to the market grants, with many suggesting specific that each objective should only be opportunities available to the uses for those funds. eligible to receive Duty to Serve credit [E]nterprise.’’ 15 The Safety and The proposed rule specifically under one evaluation area per year in an Soundness Act further states that FHFA requested comment on whether Duty to underserved market. This requirement ‘‘shall not establish specific quantitative Serve credit should be given under the is not intended to preclude or targets nor evaluate the [E]nterprises loan product evaluation area for discourage the Enterprises from based solely on the volume of loans research and development activities that undertaking multi-faceted activities and purchased.’’ 16 A Plan objective could may not show initial results. Several objectives that take place over several include the Enterprise’s plans for trade associations, nonprofit lenders, years. Rather, the Enterprises will purchasing loans in particular and policy advocacy organizations, as simply be required to identify one underserved markets, including its well as the Enterprises supported evaluation area for each objective during assessments and analyses of the market providing Duty to Serve credit for this each year of a Plan cycle that reflects the opportunities available for each activity even without initial results. A Enterprise’s primary focus for the underserved market and its expected few commenters offered qualified objective. In many instances, this may volume of loan purchases for a given support for research and development involve an Enterprise specifying year. only for targeted markets and focused separate objectives to cover actions activities provided the research and relating to different evaluation areas. 13 12 U.S.C. 4565(d)(2)(B). For example, a multi-faceted objective, 14 12 U.S.C. 4565(d)(2)(A). 17 12 U.S.C. 4565(d)(2)(D). such as one involving research and 15 12 U.S.C. 4565(d)(2)(C). 18 12 U.S.C. 1451 et seq. and 12 U.S.C. 1716 et development, could foreseeably be 16 Id. seq. assessed under outreach in year one of

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a Plan, and under loan products in year providing an Evaluation Guide to each advocacy organization stated that two of the Plan. Identifying the primary Enterprise after submission of its Plan, because of the complexity of the Plans, evaluation area for each objective, for as proposed. Specifically, FHFA will along with the number of activities they each year, will focus Enterprise efforts provide the proposed Evaluation are likely to cover, the public would and make it easier for FHFA and other Guidance to the Enterprises at least 90 likely need 60–90 days to provide stakeholders to evaluate their days before their proposed Plans are due sufficient input on the proposed Plans. performance. to FHFA and will post the proposed After considering the comments, Evaluation Guidance on FHFA’s Web FHFA has determined that a public 5. Plan Procedures—§ 1282.32(g) site for public input. For the first Plan input process for the Enterprises’ a. Submission of Proposed Plans— development cycle, FHFA expects to proposed Plans can be implemented § 1282.32(g)(1) provide the proposed Evaluation that provides transparency and an opportunity for productive public input, Section 1282.32(g)(1) of the final rule Guidance to the Enterprises within 30 while preserving the proprietary and establishes a process and timeline for days of the date of the posting of this confidential nature of Enterprise data the Enterprises to submit their proposed final rule on FHFA’s Web site. and information. Public input can Plans to FHFA for review, with some b. Posting of Proposed Plans and Public provide significant value in assisting the changes to the process and timeline in Input—§ 1282.32(g)(2), (3) Enterprises to identify the needs of the the proposed rule. The final rule also Section 1282.32(g)(2) of the final rule underserved markets, as well as the establishes distinct timelines for the establishes a process and timeline for specific activities that could help meet first Plan development cycle and public input on the Enterprises’ those needs. FHFA has also determined subsequent Plan cycles. proposed Plans, with some changes to that the proposed 45-day public input For the first Plan development cycle the process and timeline set forth in the period should be increased to 60 days. following the publication of the final proposed rule. Consistent with the Accordingly, under § 1282.32(g)(3) of rule, the Enterprises will be required to proposed approach, the final rule the final rule, for the Enterprises’ first submit their proposed Plans to FHFA provides that as soon as practical after proposed Plans, the public will have 60 within 90 days after the posting of the an Enterprise submits its proposed Plan, days from the date the proposed Plans proposed Evaluation Guidance on FHFA will post a public version of the are posted on FHFA’s Web site to FHFA’s Web site. This is a change from proposed Plan, with any proprietary and provide input. The Enterprises’ the proposed rule, which would have confidential data and information subsequent proposed Plans will be required submitting the first proposed omitted, on FHFA’s Web site for public available for public input pursuant to Plan to FHFA pursuant to a timeframe input. Section 1282.32(g)(3) of the final the timeframe and procedures and procedures to be established by rule provides that the public input established by FHFA. FHFA envisions FHFA, and would have required FHFA period for the first cycle of proposed that the timeframe and procedures for to provide to each Enterprise an Plans will be 60 days, a change from the public input on subsequent proposed individualized Evaluation Guide proposed rule’s 45 days. Plans will be specified in future containing a scoring matrix for its Plan There was broad support from a wide Evaluation Guidance. after Non-Objection to the Plan. range of commenters, including policy For subsequent proposed Plans after advocacy organizations, nonprofit c. Enterprise Review—§ 1282.32(g)(4) the first Plans, FHFA will provide intermediaries, trade associations and Consistent with the proposed rule, timelines 300 days before the state housing finance agencies for § 1282.32(g)(4) of the final rule provides termination date of the Plan in effect, or posting the Enterprises’ proposed Plans that each Enterprise may, in its a later date if additional time is for public input. Commenters stated that discretion, make revisions to its necessary for proposed Plan submission, public input would improve the quality proposed Plan based on public input. public input periods, and Non- of the Plans, add accountability to the Objection to an undeserved market in a Plan review process, and improve d. FHFA Review—§ 1282.32(g)(5) Plan. FHFA envisions that these FHFA’s evaluation of the adequacy of Section 1282.32(g)(5) of the final rule timelines will be part of the Evaluation the proposed Plans. provides that for the first Plan Guidance. Unless otherwise directed by Both Enterprises expressed concerns development cycle following FHFA, each Enterprise must submit a about posting the proposed Plans for publication of the final rule, FHFA will proposed Plan to FHFA at least 210 days public input, stating that the Plans review each Enterprise’s proposed Plan, before the termination date of the would contain proprietary and and within 60 days or such additional Enterprise’s Plan in effect. confidential information and that the time as may be necessary from the end Several policy advocacy process of preparing a public version of of the public input period, provide each organizations, a trade organization, and the proposed Plan could be time Enterprise with FHFA’s comments on both Enterprises expressed the need for intensive. The Enterprises and some its proposed Plan. FHFA has greater certainty earlier in the Plan commenters also expressed significant determined that a 60-day review period development process as to how the concerns about the proposed rule’s generally should provide sufficient time Enterprises will be evaluated by FHFA. timeline for specific actions related to for review of the Enterprises’ proposed FHFA agrees that providing more details proposing and reviewing the Plans. The Plans. on the Plan submission and review primary criticisms from various For subsequent Plan development process will assist the Enterprises in commenters were that the proposed cycles, as opposed to the 45-day review developing their proposed Plans and deadlines would not provide sufficient period in the proposed rule, the final assist the public in understanding how time for the Enterprises to develop their rule provides that FHFA will establish the Enterprises will be evaluated. proposed Plans, for stakeholders to a timeframe and procedures for FHFA Accordingly, under the final rule, FHFA provide input on the proposed Plans, for review, comments, and any required will provide the proposed Evaluation FHFA to adequately consider the public Enterprise revisions for the subsequent Guidance to the Enterprises prior to the input, and for the Enterprises to proposed Plans. FHFA envisions that date the Enterprises must submit their incorporate changes in response to the the timeframe and procedures for proposed Plans to FHFA, as opposed to public input. For example, a policy FHFA’s review of the subsequent

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proposed Plans will be specified in puts the Enterprises on notice that g. Effective Dates of Underserved future Evaluation Guidance. This will FHFA will evaluate their decisions to Markets in Plans—§ 1282.32(g)(6) allow the review process for subsequent either include or not include this Section 1282.32(g)(6) of the final rule proposed Plans to remain flexible and activity in their Plans. For example, provides that the effective date of an aligned with the future timelines for FHFA might encourage the Enterprises underserved market in a Plan that has submitting the Enterprises’ proposed to consider serving challenging regions received a Non-Objection from FHFA by subsequent Plans and publishing the or populations such as Middle December 1 of the prior year will be Evaluation Guidance. Appalachia, or challenging activities January 1 of the first evaluation year for The Enterprises will be required to such as shared equity homeownership which the Plan is applicable. Where an address FHFA’s comments on their or agricultural workers’ housing, which underserved market in a Plan does not proposed Plans, as appropriate, through could require more time and effort to revisions to their proposed Plans receive a Non-Objection by December 1 make an impact on the underserved of the prior year, the effective date for pursuant to the timeframe and market than other activities. In procedures established by FHFA. that underserved market will be determining whether to issue a Non- determined by FHFA. This provision is e. Designation of Statutory or Regulatory Objection where an Enterprise has changed from the proposed rule to take Activity for FHFA Consideration in chosen not to include the designated into account that the timing of receiving Issuing a Non-Objection— Statutory or Regulatory Activity in its Non-Objections for each of the § 1282.32(g)(5)(iii) Plan, FHFA will consider whether the underserved markets in a proposed Plan Enterprise has made a convincing case may impact the effective dates for those Section 1282.32(g)(5)(iii) of the final in its Plan for not including it. rule provides that FHFA may, in its sections of the Plan. Based on the extent discretion, designate in the Evaluation f. FHFA Non-Objections to Underserved of the delay, FHFA will also describe Guidance one Statutory Activity or Markets in a Plan—§ 1282.32(g)(5)(iv) the impact of any delay in a Plan’s Regulatory Activity in each underserved effective date on the evaluation and This final rule provides that FHFA market that FHFA will significantly rating processes for the affected will issue three Non-Objections for a consider in determining whether to underserved market. Plan—one for each underserved provide a Non-Objection to that market—and not for the Plan as a whole. h. Posting of Underserved Market underserved market in an Enterprise’s Sections of Plans—§ 1282.32(g)(7) proposed Plan. This provision was not Section 1282.32(g)(5)(iv) of the final rule included in the proposed rule. provides that after FHFA is satisfied that Section 1282.32(g)(7) of the final rule This provision evolved from all of its comments on an individual provides that as soon as practical after comments that FHFA received underserved market section in an FHFA issues a Non-Objection to an suggesting that some Statutory and Enterprise’s proposed Plan have been underserved market in an Enterprise’s Regulatory Activities are so important addressed, FHFA will issue a Non- Plan, that section of the Plan will be that FHFA should require the Objection for that underserved market posted on the Enterprise’s and FHFA’s Enterprises to engage in them. Several in the Plan. This is a change from the respective Web sites, with any commenters recommended a number of proposed rule, which would have confidential and proprietary data and specific Statutory or Regulatory required FHFA to issue a single Non- information omitted. This provision is Activities that should be mandatory, Objection for the entire proposed Plan. revised from the proposed rule to take with residential economic diversity and Several policy advocacy organizations into account that particular underserved a chattel manufactured housing pilot commented that the proposed rule did markets in a proposed Plan may receive being the most frequently cited, on the not make clear the procedures and Non-Objections at different times. basis that these activities are the most consequences FHFA would invoke in the event its issuance of a Non- 6. Modifying Underserved Markets likely to have an impact on the Plans—§ 1282.32(h) underserved markets. Objection delayed the start of a Plan. After considering the comments, This could occur under the proposed As proposed, § 1282.32(h) of the final FHFA has determined to maintain the approach where FHFA is not satisfied rule provides that at any time after approach in the proposed rule and not that its comments on an Enterprise’s implementation of a Plan, an Enterprise make any Statutory or Regulatory plans for a particular underserved may request to modify its Plan during Activities mandatory in the final rule. market have been addressed and FHFA the three-year term, subject to FHFA FHFA has concerns that mandating a is unable to issue a Non-Objection to the Non-Objection of the proposed specific activity, without first entire Plan, thereby preventing the modifications, and FHFA may require considering how the Enterprise would Enterprise from commencing an Enterprise to modify its Plan during propose conducting an activity to implementation of its Plan in all of the the three-year term. FHFA and the ensure that it would be undertaken in a three underserved markets. Under the Enterprises may seek public input on safe and sound manner, would be final rule, FHFA will issue a separate proposed modifications to a Plan if inadvisable. Non-Objection for each of the three FHFA determines that public input Instead, § 1282.32(g)(5)(iii) of the final underserved markets, which will enable would assist its consideration of the rule provides that FHFA may, in its the Enterprises to proceed with proposed modifications. If a Plan is discretion, designate in the Evaluation implementing their plans for a modified, the modified Plan, with any Guidance one Statutory or Regulatory particular underserved market that has confidential and proprietary Activity in each underserved market received a Non-Objection without information and data omitted, will be that FHFA will significantly consider in having to wait for FHFA’s Non- posted on the Enterprise’s and FHFA’s determining whether to provide a Non- Objection to the other underserved respective Web sites. Objection to that underserved market in markets. The next section describes the Several commenters, including both a proposed Plan. This provision of the final rule’s approach in the event that Enterprises, supported allowing the final rule provides FHFA with the there is a delay in FHFA’s ability to final Plans to be modified during the authority to transparently communicate provide a Non-Objection for one or more three-year term. A number of a priority activity to the Enterprises and underserved markets in a Plan. commenters also recommended that

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FHFA require the Enterprises to solicit product or new activity for FHFA because of concerns about the structural public input on their proposed Plan consideration. integrity of pre-HUD Code homes, modifications, with some suggesting activities related to manufactured C. Underserved Markets between 30 and 90 days for such input. homes that are not compliant with the Policy advocacy organizations also 1. Manufactured Housing Market— HUD Code are excluded from the recommended that FHFA provide § 1282.33 definition and activities supporting public notice when significant The below section describes the final them are not eligible for Duty to Serve modifications to a final Plan receive a rule provisions for the manufactured credit in the final rule. Non-Objection, with the modifications housing market and explains FHFA’s Some commenters favored Duty to and rationale for FHFA’s Non-Objection rationale for adopting four Regulatory Serve credit for Enterprise support for detailed. Freddie Mac strongly Activities for this market. The financing of pre-HUD Code supported allowing Plan modifications, Regulatory Activities are for: (1) manufactured homes (i.e., those built and recommended that FHFA establish Manufactured homes titled as real prior to June 15, 1976). A nonprofit a simple notice and review process property, (2) manufactured homes titled organization focused on rural housing without public input when as personal property, (3) manufactured estimated that one-fifth of rural modifications merely reflect changes in housing communities owned by manufactured homes are pre-HUD Code the market. 20 government units or instrumentalities, mobile homes. In joint comment After considering the comments, letters, two manufactured housing trade FHFA has determined that Plan nonprofits, or residents; and (4) manufactured housing communities associations noted that in ‘‘55 and over’’ modifications generally should be manufactured housing communities, permitted, as set forth in the proposed with specified minimum tenant pad lease protections. some residents are low-, fixed-income rule. Because of the detailed level of seniors with no source of financing for information that the Enterprises need to FHFA’s final rule does not adopt the small manufactured housing community their pre-HUD Code mobile homes. include in their Plans, FHFA envisions They further noted that in ‘‘all age allowing the Enterprises to annually Regulatory Activity that was included in the proposed rule. The below section communities,’’ pre-HUD Code home adjust their Plans to reflect their occupants are often low-income and progress, to incorporate lessons learned also discusses the affordability methodology adopted in the final rule. work ‘‘blue collar’’ jobs or depend on from executing their Plans, and to make government assistance. other appropriate adjustments. a. Eligible Activities—§ 1282.33(b) Pre-HUD Code homes, even those Additionally, FHFA envisions utilizing with modifications, do not meet HUD the same annual adjustment to ensure Section 1282.33(b) of the final rule provides that Enterprise activities standards and cannot be accepted as that Plan objectives continue to compliant with the HUD Code.21 FHFA represent meaningful progress over eligible to be included in a Plan for the manufactured housing market are acknowledges the financing needs for time. However, to maintain the integrity owners of pre-HUD Code homes and of the final Plans, ad hoc modifications, activities that facilitate a secondary market for mortgages on residential may reconsider the matter in a future occurring outside of the annual rulemaking if appropriate adjustment, should occur only in properties for very low-, low-, or moderate-income families in the methodologies can be found for assuring special circumstances and should not be the structural integrity of the homes. a routine part of the process. Instances manufactured housing market. The in which FHFA might require an manufactured housing market consists b. Regulatory Activities—§ 1282.33(c) Enterprise to modify its Plan include of manufactured homes and manufactured housing communities. As Section 1282.33(c) of the final rule significant changes in market establishes four specific Regulatory conditions, including obstacles and defined in the final rule, manufactured homes include: (i) Manufactured homes Activities under the manufactured opportunities, or significant safety and housing market. Two of these soundness concerns arising during the titled as personal property (also referred to as ‘‘chattel’’), and (ii) manufactured Regulatory Activities pertain to three-year term of the Plan. Enterprise support for financing of FHFA is more likely to seek public homes titled as real property. The single-family manufactured homes titled input on a proposed Plan modification proposed rule would have included as real property or chattel, and two where an Enterprise requests to manufactured housing communities and pertain to Enterprise support for eliminate an activity or objective from manufactured homes titled as real financing of blanket loans for its Plan, or make numerous changes to property, but not manufactured homes manufactured housing communities. the Plan, as opposed to, for example, a titled as chattel. As further discussed request to modify the measurable below, after extensive research and (i) Chattel: Loans on Manufactured quantity of an objective by a modest consideration of the comments received Homes Titled as Personal Property— amount. on chattel lending, FHFA has also § 1282.33(c)(2) included Enterprise support for chattel Section 1282.33(c)(2) of the final rule 7. Enterprise New Products and New loans as a Regulatory Activity in the establishes a Regulatory Activity for Activities final rule. Enterprise new products and new Enterprise activities related to Definition of ‘‘Manufactured Home’’ activities are subject to the prior facilitating a secondary market for loans approval and prior notice requirements Consistent with the proposed rule, on manufactured homes titled as pursuant to the Safety and Soundness § 1282.1 of the final rule defines 20 See Housing Assistance Council, ‘‘Moving 19 Act. If an Enterprise determines that a ‘‘manufactured home’’ to mean a home Home—Manufactured Housing in Rural America’’ new product or new activity would as defined in section 603(6) of the (Dec. 2005), available at http://www.ruralhome.org/ facilitate its Duty to Serve obligations National Manufactured Housing storage/documents/movinghome.pdf. and would be consistent with safety and Construction and Safety Standards Act 21 See generally U.S. Department of Housing and Urban Development, ‘‘Frequently Asked Questions’’ soundness, it may propose that new of 1974, as amended (42 U.S.C. 5401 et (HUD homepage), available at http:// seq.) (referred to here as the ‘‘HUD portal.hud.gov/hudportal/HUD?src=/program_ 19 See 12 U.S.C. 4541. Code’’). As in the proposed rule and offices/housing/rmra/mhs/faqs.

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personal property, also referred to as protections. A state housing finance percentage of new manufactured homes chattel. The proposed rule did not agency similarly supported Duty to titled as chattel has increased from 67 include chattel lending as an eligible Serve credit for a chattel pilot provided percent in 2009 to 80 percent in 2015.23 activity under the manufactured there are strong underwriting and tenant Additionally, efforts to expand the real housing market. The proposed rule protections. estate titled share of the market have discussed issues related to chattel loans A federal financial regulatory agency faced some difficulties.24 FHFA also and specifically requested comment on did not take a position on Duty to Serve makes this change having considered whether the Enterprises should receive credit for chattel loans but urged FHFA the potential for the Enterprises to Duty to Serve credit for purchasing to protect chattel loan borrowers, whom improve the chattel lending market chattel loans, either on a pilot or an the agency stated are particularly through standardization that includes ongoing basis. vulnerable to unfair lending practices. borrower protections. FHFA received almost 1,400 comment A trade association for community In making this change in the final letters on whether Enterprise purchases bankers was among the few commenters rule, FHFA is also aware of the of chattel loans should be an eligible opposing Duty to Serve credit for chattel challenges and risks, which FHFA activity that receives Duty to Serve loans. The trade association expressed discussed in detail in the proposed rule, credit. The vast majority of the letters general concern about the Enterprises’ that the Enterprises would face in were form letters signed by individuals safety and soundness, as well as the exploring the chattel lending market. As and small businesses in the risks that attend chattel lending, stating is discussed in the following sections, manufactured housing industry that more could be done to support real FHFA would require the Enterprises to recommending Duty to Serve credit for estate lending for manufactured methodically assess ways to mitigate Enterprise support of chattel loans. housing, which the trade association these challenges and risks before FHFA also received many individual stated is a safer loan product. A joint beginning any chattel loan purchases. comment letters from trade associations, comment letter signed by several policy Additionally, FHFA would also conduct consumer advocacy organizations, and advocacy organizations and nonprofit a thorough review and assessment of manufactured housing community organizations opposed any Duty to any chattel loan pilot initiative, both owners and operators supporting Duty Serve credit for chattel loans, noting the when proposed by the Enterprise and, if to Serve credit for chattel loans. Three abuses and high default rates detailed in approved, throughout its execution by Members of Congress also supported the SUPPLEMENTARY INFORMATION to the the Enterprise. This review is a core part Duty to Serve credit for chattel loans. proposed rule. of FHFA’s regulatory responsibilities in Several trade associations for the Freddie Mac opposed Duty to Serve overseeing all of the Enterprises’ Duty to manufactured housing industry favored credit for chattel loans, as it did in its Serve activities, but FHFA believes it is Duty to Serve credit for chattel loans but comment letter on the 2010 proposed appropriate to emphasize this point for acknowledged that modifications such rule, without providing a rationale. chattel lending since it would be a new as credit enhancements and greater Fannie Mae did not address chattel purchase activity for the Enterprises. borrower protections could facilitate loans, a change from its comment letter Review of Enterprise Chattel Loan secondary market support for these on the 2010 proposed rule in which it Pilot Initiatives. Initially, only approved loans. One trade association for the opposed Duty to Serve credit for chattel chattel loan pilot initiatives included in manufactured housing industry had a loans. an Enterprise’s Plan would be eligible different view, strongly supporting Duty After considering the comments, for Duty to Serve credit. Under an to Serve credit for chattel loans but FHFA has decided to establish a new opposing any additional credit Regulatory Activity in § 1282.33(c)(2) of reported under HMDA are held in portfolio by the enhancements or borrower protections the final rule for Enterprise support for lenders, compared with 16 percent for site-built homes. See Consumer Financial Protection Bureau, for chattel loans. All of these chattel loans. While FHFA expects the ‘‘Manufactured-housing consumer finance in the manufactured housing industry Enterprises to also serve manufactured United States,’’ p. 37 (Sept. 2014), available at commenters advised that manufactured http://files.consumerfinance.gov/f/201409_cfpb_ homes titled as real estate, which _ housing is a significant source of include borrower protections and is report manufactured-housing.pdf. 23 See U.S. Commerce Department, Census unsubsidized affordable housing and discussed in greater detail in the next Bureau, ‘‘Cost & Size Comparisons For New manufactured home borrowers have section, FHFA has also determined that Manufactured Homes and New Single-Family Site- significant needs for financing that are the pursuing pilot initiatives, in safe Built Homes’’ (2007–2015), available at https:// not being met. The commenters further and sound manner, that serve very low- www.census.gov/data/tables/2015/econ/mhs/2015- stated that the absence of a secondary annual-data.html. , low-, and moderate-income 24 One factor inhibiting the potential for market market and the lack of available households who live in manufactured change is that manufactured home dealers and financing for chattel loans have severely homes titled as chattel, should be lenders are not legally obligated to explain the impacted the manufactured housing eligible for Duty to Serve credit. titling of homes to buyers or its implications. See industry, resulting in closures of many generally Ann M. Burkhart, Bringing Manufactured FHFA makes this change in the final Housing into the Real Estate Finance System, 37 factories nationwide. Several trade rule having considered the feedback Pepp. L. Rev. 427, 443 (Mar. 2010), available at associations for the manufactured from many commenters in support of http://cfed.org/assets/pdfs/manufactured_housing/ _ _ _ housing industry and a financial providing the Enterprises with Duty to advocacy center/mht/Burkhart MH Finance.pdf. marketing corporation commented that Another factor is that state laws for converting the Serve credit for chattel-titled lending. titles of manufactured homes from chattel to real much of the pricing disparity between FHFA also makes this change having property present challenges. For example, some chattel loans and real estate loans considered the potential for the states prohibit converting titles for manufactured results from the absence of a significant homes on leased land. See National Consumer Law Enterprises’ to improve liquidity and Center, ‘‘Titling Homes as Real Property’’ (Oct. secondary market for chattel loans. access to credit in the manufactured 2015), available at https://www.nclc.org/images/ In a change from their comments on housing market generally and for very pdf/manufactured_housing/titling-homes2.pdf. See the 2010 proposed rule, a number of low-, low-, and moderate-income also Ann M. Burkhart, Bringing Manufactured consumer advocacy organizations and households.22 For example the Housing into the Real Estate Finance System, 37 nonprofit organizations favored Duty to Pepp. L. Rev. 427, 443–444 (Mar. 2010), available at http://cfed.org/assets/pdfs/manufactured_ Serve credit for chattel loans as long as 22 One indicator of how little liquidity exists is housing/advocacy_center/mht/Burkhart_MH_ there are adequate consumer that over 70 percent of manufactured home loans Finance.pdf.

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Enterprise Plan to pursue such a chattel chattel pilot would be access to reliable percent recovery rate.29 FHA data loan pilot initiative, FHFA review of the data about chattel loan performance. further show that interest rates on Title pilot initiative would also be required According to manufactured housing I chattel loans ranged around 7 to 8 under the new product and activities industry representatives, since the percent in recent years. These rates may statute prior to any purchases by the manufactured housing subprime crisis appear high in comparison to interest Enterprise of chattel loans.25 To in 1999 to 2000, manufactured home rates for site-built homes with fixed rate, facilitate a timely new product review, loan underwriting standards and 30-year mortgages. However, the Title I an Enterprise’s Plan should indicate practices have sharply improved.26 rates are relatively low compared to when the Enterprise expects to However, little default and foreclosure those for conventional chattel loans, commence purchasing chattel loans as data for conventional chattel loans are which were reported to be in the 7 to part of a pilot initiative prior to any publicly available to determine how 13 percent range in early 2015.30 purchases by the Enterprise of chattel well chattel loans have performed.27 FHFA expects that the Enterprises, in loans. pursuing a chattel loan pilot initiative, As described in greater detail below, This limited data about chattel would significantly build on the data FHFA will carefully assess a number of lending has not only been a challenge available through FHA’s Title I program factors in reviewing any chattel loan for FHFA in developing this rule, but by partnering with manufactured pilot or ongoing initiative included in FHFA also understands that it will be an housing lenders to access performance an Enterprise Plan. While the final rule ongoing challenge for the Enterprises in data on chattel loans, including, where does not contain pre-determined developing any chattel loan pilot possible, for chattel loans currently held limitations on pilot chattel loan initiative. Therefore, as part of any Plan in portfolio by lenders that serve this initiatives, FHFA could include such that includes chattel loan activities, market. parameters in the Evaluation Guidance. FHFA expects that the Enterprises As the Enterprises develop For example, the final rule does not would work to develop better financial information about chattel loan restrict the location of the manufactured performance data both in preparation performance, FHFA expects that this homes (within or outside of a for a chattel loan pilot purchase would impact Enterprise decisions on manufactured housing community), the initiative and through the how to appropriately price these loans. volume of Enterprise chattel loan implementation of the pilot itself. On this point, a trade association for the purchases, the duration of any initiative, One source of chattel loan data that, manufactured housing industry or the Enterprises’ counterparties. Nor while limited, would be relevant in suggested charging appropriate loan does the final rule restrict the specific considering a chattel loan pilot level price adjustments and guarantee terms and features of an acceptable initiative is the Federal Housing fees as possible conditions for chattel chattel loan product beyond those Administration’s (FHA) Title I initiatives by the Enterprises. The restrictions applicable to all single- manufactured home chattel loans pricing on the FHA Title I program has family loan purchases. However, FHFA resulted in a projected 4 percent surplus insurance program. Data for the 2010 31 could address some of these parameters originations of Title I chattel loans show over its expected costs. Also, loan modifications for some borrowers have in the Evaluation Guidance, and FHFA that as of year-end 2015, claims had been one way to allow them to stay in will also consider them in determining been filed with FHA on 218 out of 1,789 their homes and, at the same time, whether to provide a Non-Objection to loans endorsed (12 percent).28 Data for mitigate losses to lenders. Part of the an Enterprises Plan for the Title I chattel loans showing the manufactured housing market and for assessment of the performance of chattel percentage of delinquencies, however, purposes of the new product review. loans would include analysis of FHFA will review the results of a are not available. Also, credit score data available loan modification efforts. chattel loan pilot initiative conducted on Title I loans are incomplete due to Risk Mitigants. In designing a chattel by an Enterprise, including an the lack of credit scores for some loan pilot initiative, FHFA would also assessment of safety and soundness. If at borrowers who do not have traditional expect the Enterprises to incorporate any time FHFA believes that such a credit accounts on which scores are appropriate risk mitigants into the pilot pilot poses a risk to the safety and generated by the national credit design. In addition to limiting the soundness of the Enterprises, as with agencies. The Office of Management and volume or duration of the chattel loan any activity under a Duty to Serve Plan, Budget projects that Title I chattel loans pilot initiative, one type of risk mitigant FHFA would require the Enterprise to for fiscal year 2017 will have a 19 could be to tighten underwriting modify or stop its activities accordingly. requirements for credit scores, down If, however, FHFA determines that a 26 See Cavco Industries, Inc., ‘‘Annual Report on pilot initiative has been successful, and Form 10–K for the Fiscal Year Ended March 28, 29 See Office of Management and Budget, Federal 2015,’’ pp. 8–9 (Mar. 28, 2015), available at http:// Credit Supplement—Budget of the U.S. the Enterprise wishes to pursue an investor.cavco.com/public/phhweb/gallery/ Government, Fiscal Year 2017, p. 14 (Table 4) _ _ ongoing initiative for chattel loans, that userupload/ir-doc-386/cvco 2015.3.28 10k.pdf; (2016) [hereinafter cited ‘‘OMB Forecast’’], available ongoing initiative would require FHFA George Allen, ‘‘Manufactured Housing Primer,’’ pp. at https://www.whitehouse.gov/sites/default/files/ approval. 2–3 (Franklin Printing, Apr. 2010). See generally omb/budget/fy2017/assets/cr_supp.pdf. Ronald Wirtz, ‘‘Home, sweet (manufactured?) 30 The below sections discuss a number See Paola Iuspa, ‘‘Refinancing mobile home home,’’ Fedgazette (Federal Reserve Bank of loan at lower rate,’’ Bankrate.com (Jan. 23, 2015), of factors that FHFA will consider in Minneapolis, July 1, 2005), available at https:// available at http://www.bankrate.com/finance/ reviewing any Enterprise Plan to pursue www.minneapolisfed.org/publications/fedgazette/ refinance/refinancing-mobile-home-loan.aspx. One pilot chattel loan initiatives, including home-sweet-manufactured-home. researcher found that at the middle of 2012, chattel 27 the financial performance of chattel Regarding the paucity of data on manufactured financing rates were typically at 15 percent. See housing overall, see generally Matthew Furman, Darla Hailey, ‘‘Mobile Home Decommissioning and loans, possible risk mitigants, and ‘‘Eradicating Substandard Manufactured Homes: Replacement Research in the Pacific Northwest,’’ borrower and tenant protections. Replacement Programs as a Strategy,’’ p. 4 (Nov. p. 7 (Sept. 2016), available at https:// Financial Performance of Chattel 2014) (A paper submitted to Harvard’s Joint Center rtf.nwcouncil.org/subcommittee/small-and-rural- Loans. An important factor in for Housing Studies and NeighborWorks America), utility-rtf-technical-support-subcommittee. available at http://www.jchs.harvard.edu/sites/ 31 See OMB Forecast, p. 6 (Table 2) (2016), determining the potential success of any jchs.harvard.edu/files/w15-3_furman.pdf. available at https://www.whitehouse.gov/sites/ 28 This was one of the higher claim rates in recent default/files/omb/budget/fy2017/assets/cr_ 25 See 12 U.S.C 4541. years. supp.pdf.

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payments, loan-to-value ratios (LTV), Procedures Act (RESPA), which The final rule, therefore, allows for a debt-to-income ratios, and borrower prohibits inappropriate kickbacks, wide range of Enterprise activities reserves. Another risk mitigant could be requires disclosures of settlement costs, supporting chattel loans to be eligible having chattel loans purchased by the and requires proper loan servicing.33 for Duty to Serve credit. For example, Enterprises secured not only by a lien The proposed rule described potential Enterprise outreach to potential on the title to the home, but also by a difficulties in replicating RESPA-like counterparties could count under the lien on the underlying land, as one protections for chattel loan borrowers.34 outreach evaluation area, and Enterprise manufactured housing trade association A number of manufactured housing research and development could count suggested. Additionally, loan trade associations commented in favor under the outreach evaluation area or modifications for some borrowers have of adding these protections for chattel the loan product evaluation area even been one way to allow them to stay in loan borrowers. Several nonprofit where it does not result in actual their homes and, at the same time, organizations suggested that housing purchases of chattel loans by the mitigate losses to lenders. counseling be required for chattel loan Enterprise. The Enterprises’ publication Credit enhancements that share credit borrowers, although another nonprofit of their research and findings could risk with private investors are an organization pointed out that there is a benefit the entire manufactured housing additional risk mitigant, although the shortage of counselors with training in market, which could also work to Enterprises would need to develop manufactured housing. FHFA is also further liquidity in this market. counterparty relationships and concerned about a lack of tenant Request for Information (RFI). In light approaches tailored for these loans. protections in the pad leases for chattel of the many considerations that the None of the Enterprises’ approved borrowers whose homes are located on Enterprises would need to make in mortgage insurer counterparties leased land. designing and proposing a chattel pilot initiative, FHFA has determined to issue currently offers mortgage insurance for FHFA expects that the Enterprises chattel loans, and bond insurance is also an RFI to the public on what an would seek feedback from stakeholder Enterprise should include in a chattel unavailable. groups about how best to design the The Enterprises could require loan pilot initiative, if an Enterprise decides borrower and tenant protections for any to pursue a pilot initiative. FHFA has sellers to repurchase the loan or retain chattel loan pilot initiative. This a participation of at least ten percent in determined that the RFI will conclude approach will provide important input in time for the Enterprises to consider the loan to meet the requirements of the on how the Enterprises should balance 32 the input from the RFI in any chattel Enterprises’ charter acts. providing appropriate borrower and In pursuing such an approach, the pilot initiative that may be included in tenant protections with designing the Enterprises would need to consider the an Enterprise’s draft Plan. pilot in a way that is operationally financial strength of the counterparty, feasible for the Enterprises and their (ii) Manufactured Homes Titled as Real which would be an important factor in counterparties. Property—§ 1282.33(c)(1) assessing the total credit risk of a transaction. Additionally, as the Preparations for Loan Purchases. Consistent with the proposed rule, Enterprises work to develop loan FHFA understands that the Enterprises § 1282.33(c)(1) of the final rule performance data, the Enterprises could would need to expend substantial effort establishes a Regulatory Activity for explore developing credit risk transfer and would incur non-trivial costs prior Enterprise support of financing for approaches specific to chattel loans, to implementing a chattel loan pilot manufactured homes titled as real separate from the credit enhancement initiative.35 As discussed above property. A wide range of commenters asserted requirements of the charter acts. concerning access to better financial FHFA would assess these and any performance data, Enterprise research that there is a need for Enterprise other risk mitigants included by an and development efforts would need to support for this market. Manufactured Enterprise in a proposed chattel loan precede any purchases of chattel loans, housing industry commenters stated pilot before the Enterprise could begin including developing expertise, that while real estate-titled homes are a any loan purchases. designing pilot parameters, reviewing smaller part of the manufactured Borrower and Tenant Protections. potential counterparties, researching housing market than chattel-titled Before approving any chattel loan investors and securities structures, and homes, there are changes the Enterprises purchases by the Enterprises, FHFA developing appropriate borrower and could make to assist this market. A would also expect the Enterprises to tenant protections to be integrated as manufactured housing trade association require meaningful borrower and tenant counterparty requirements. Enterprise suggested that Enterprise guarantee fees protections beyond those required counterparties would also need to be for loans on real estate-titled homes be under current law. As one regulatory prepared to accurately report their comparable to those for loans on site- agency commented, chattel loan chattel loan data and to adopt strong built homes. The commenter also borrowers are subject to increased risks compliance and internal auditing recommended that a number of terms due to the lack of borrower and tenant standards. and conditions of the Enterprises’ protections for chattel loans. The mortgage products for real estate-titled relative lack of consumer protections, 33 See generally 12 U.S.C. Ch. 27; Consumer homes be modified, such as financing of compared to those households with a Financial Protection Bureau, ‘‘CFPB Consumer property damage insurance, liberalizing manufactured home titled as real estate, Laws and Regulations—RESPA’’ (Apr. 2015), the LTV requirements, and financing available at http://files.consumerfinance.gov/f/ pre-HUD Code homes in some was also discussed at length in the 201503_cfpb_regulation-x-real-estate-settlement- proposed rule. The main protections for procedures-act.pdf. instances. Except for the general requirements real estate mortgage borrowers, which 34 See 80 FR at 79190 (Dec. 18, 2015). 35 applicable to all single-family loan chattel loan borrowers lack, are those Regarding the difficulties involved in establishing an Enterprise pilot for chattel loans, see purchases, the final rule does not afforded by the Real Estate Settlement generally Titus Dare, ‘‘A Deeper Look at why the incorporate commenters’ specific GSEs say no to Securitizing Chattel Loans,’’ 32 See generally 12 U.S.C. 1717(b)(1) (Fannie Mae MHProNews (May 24, 2016), available at http:// suggestions regarding the terms and Charter Act); 12 U.S.C. 1454(a)(1) (Freddie Mac www.mhmarketingsalesmanagement.com/blogs/ conditions for mortgages on real estate- Charter Act). industryvoices/tag/titus-dare/. titled homes purchased by the

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Enterprises. These suggestions are more qualifies under both Regulatory addition, the commenter suggested that appropriate to be raised by the Activities because government-, the Enterprises collect, analyze, and commenters directly with the nonprofit-, or resident-owned owned publish data on manufactured housing Enterprises during the development and communities are likely to already have communities, in order to develop implementation of the Enterprises’ meaningful tenant pad lease protections. investor interest. The commenter Plans.36 Freddie Mac supported Duty to Serve advised that this would improve The proposed rule specifically credit for activities that generally liquidity and lower the costs to requested comment on whether Duty to support affordable manufactured borrowers. A state housing finance Serve credit for real estate-titled housing communities, without limiting agency supported the proposed manufactured homes should be limited eligibility to the specific Regulatory Regulatory Activity, stating that small to certain situations, such as when Activities in the proposed rule, stating communities need the most financing refinancing borrowers with excessive that this would be consistent with assistance. A manufactured housing interest rates.37 A wide variety of Congressional intent. community investor and consultant also commenters opposed any limitations on A manufactured housing trade supported the proposed Regulatory Duty to Serve credit for real estate-titled association opposed any Duty to Serve Activity without providing a rationale. homes because of the shortage of credit for Enterprise support for A larger number of commenters funding for manufactured housing manufactured housing communities, opposed the proposed Regulatory overall and the acute housing needs of maintaining that manufactured home Activity. For example, a policy lower-income borrowers. FHFA is communities are not an underserved advocacy organization opposed basing a persuaded by these comments and has market and do not address the critical Regulatory Activity on the size of a not included any such limitations in the challenge for homeowners, which is community, stating that while it is final rule. affordable financing for chattel-titled reasonable to assume that smaller FHFA notes that mortgages on real manufactured homes facilitated by a manufactured housing communities estate-titled manufactured homes strong Enterprise secondary market. face greater challenges in attracting generally perform well. The borrowers Two state trade associations for the capital than larger communities, the for these homes are subject to the same manufactured housing industry Enterprises already support financing of consumer protections as borrowers for similarly opposed Duty to Serve credit smaller communities. The commenter site-built homes, and the housing is for manufactured housing community instead favored Enterprise support for affordable relative to site-built housing. loans and preferred that the Enterprises manufactured communities located in In addition, the Enterprises already have focus on manufactured home loans. geographies with greater needs, such as an infrastructure in place for purchasing As further discussed below, the final high-cost areas where manufactured and servicing mortgages on real estate- rule retains two of the proposed housing community preservation would titled manufactured homes. Regulatory Activities, with some secure affordable housing for many modifications, but does not include the (iii) Manufactured Housing years. The commenter asserted that of third proposed Regulatory Activity for Communities—§ 1282.33(c)(3) the three proposed Regulatory Activities Enterprise support for financing small for manufactured housing communities, Section 1282.33(c)(3) of the final rule manufactured housing communities. the Enterprises would favor serving establishes the following Regulatory smaller communities because it would Activities for Enterprise support for (a) Small Manufactured Housing Communities be the easiest Regulatory Activity to manufactured housing communities, pursue. with some modifications from the In a change from the proposed rule, Most other commenters who proposed rule: (1) Support for blanket the final rule does not include addressed the proposed Regulatory loans on government-, nonprofit-, or Enterprise support for the financing of Activities for manufactured housing resident-owned manufactured housing blanket loans on small manufactured communities also saw no particular communities, and (2) support for housing communities (communities need for targeted Enterprise support for blanket mortgages on manufactured with 150 or fewer pads) as a Regulatory the small manufactured community housing communities with minimum Activity. As discussed in the submarket. The commenters said that tenant protections in the pad leases. The SUPPLEMENTARY INFORMATION to the there is no correlation between the size definition of ‘‘manufactured housing proposed rule, this Regulatory Activity of a community and the affordability it community’’ in § 1282.1 of the final rule was proposed because the Enterprises’ provides to residents with limited remains unchanged from the proposed purchases to date had tended to be for financial means. A trade association for rule—a tract of land under unified loans on larger manufactured housing owners of manufactured homes opposed ownership and developed for the communities, and existing funding for the proposed Regulatory Activity, purpose of providing individual rental smaller communities was likely to have commenting that the number of pads in spaces for the placement of variable interest rates and balloon a community is less relevant than the manufactured homes for residential payments at the end of the mortgage need to provide tenant protections. In purposes within its boundaries. term. addition, a trade association for the The final rule does not allow Few commenters specifically manufactured housing industry and a additional Duty to Serve credit where a addressed this proposed Regulatory state housing finance agency expressed manufactured housing community Activity. A trade association supported doubts about conditioning access to the proposed Regulatory Activity Duty to Serve credit on the size of the 36 Commenters in a number of circumstances because the need for financing in this manufactured housing community. addressed individual underwriting recommendations. As noted throughout, FHFA market is for the older or rural Neither Enterprise supported the encourages the Enterprises to consider this communities that tend to be smaller in proposed Regulatory Activity, although feedback, although FHFA also notes that this size. The commenter further suggested Freddie Mac favored service to this should not be construed as an endorsement by that the Enterprises develop prudent market as an ‘‘Additional Activity.’’ FHFA of those comments and FHFA will review any underwriting guidelines as part of its review of underwriting standards that would Freddie Mac stated that very small Enterprise Plans for Non-Objection. expand Enterprise loan purchases manufactured housing communities 37 See 80 FR at 79190 (Dec. 18, 2015). beyond higher-end communities. In have a higher chance of being below

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investment grade and that there are preserving sustainable manufactured government units or instrumentalities, economy of scale difficulties with small housing communities and also tend to nonprofits, or residents. communities. Freddie Mac also stated be safer investments. A nonprofit (c) Manufactured Housing Communities that 25 percent of its blanket loan organization stated that lot rents in With Specified Minimum Tenant Pad portfolio is loans on communities with resident-owned communities remain Lease Protections—§ 1282.33(c)(4) fewer than 150 pads. An academician affordable following the residents’ stated that the proposed Regulatory purchase of the communities. Section 1282.33(c)(4) of the final rule Activity would encourage service to the establishes a Regulatory Activity for Several manufactured housing trade least efficient sector of the market. In Enterprise support for blanket loans on associations opposed the proposed the SUPPLEMENTARY INFORMATION to the manufactured housing communities that proposed rule, FHFA noted that blanket Regulatory Activity, as well as any other have certain specified minimum pad loans for smaller manufactured housing Regulatory Activity for manufactured lease protections for tenants. These communities are frequently originated housing communities, based on the protections address renewable lease by local banks or credit unions and held view that support for manufactured terms, rent increases and payments, unit in portfolio. FHFA did not receive housing communities would not carry sale and sublease rights, and advance comment letters from community banks out the Duty to Serve mandate. For notice of a planned sale or closure of the or credit unions indicating support for instance, one commenter objected to the community. The final rule incorporates or opposition to this proposed type of ownership of a manufactured several modifications to the tenant Regulatory Activity. housing community affecting access to protections in the proposed rule. By After considering the comments, it capital, and stated that government- establishing this Regulatory Activity, appears that this proposed Regulatory owned manufactured housing FHFA seeks to encourage manufactured Activity would provide relatively less communities should not have easier housing communities to adopt pad lease assistance to the very low-, low-, and access to Enterprise support than other protections for tenants, or enhance moderate-income families targeted for types of manufactured housing existing pad lease protections. The assistance by the Duty to Serve, as communities. minimum pad lease protections in the compared with the two Regulatory final rule are: FHFA has determined that making • Activities for manufactured housing Enterprise support for manufactured One-year renewable lease term communities retained in the final rule. housing communities owned by unless there is good cause for Nevertheless, if an Enterprise proposed government units or instrumentalities, nonrenewal; support for smaller manufactured • 30-day written notice of rent nonprofits, or residents eligible for Duty housing communities as a qualifying increases; to Serve credit is consistent with the Additional Activity and provided • 5-day grace period for rent Enterprises’ Duty to Serve detailed information on a targeted payments, and the right to cure defaults responsibilities because these types of market need, FHFA would consider it in on rent payments; and communities typically serve lower- reviewing the Enterprise’s Plan. • Right of tenants to: income residents, remain residential (A) Sell the manufactured home (b) Manufactured Housing Communities communities, promote fair treatment of without having to first relocate it out of Owned by Government Units or tenants, and help preserve permanent the community; Instrumentalities, Nonprofits, or affordability for their residents.38 One (B) Sublease the home or assign the Residents—§ 1282.33(c)(3) study found that residents of resident- pad lease for the unexpired term to the Consistent with the proposed rule, owned communities ‘‘have consistent new buyer of the tenant’s manufactured § 1282.33(c)(3) of the final rule economic advantages over their home without any unreasonable establishes a Regulatory Activity for counterparts in investor-owned restraint; Enterprise support for mortgages on communities, as evidenced by lower lot (C) Post ‘‘For Sale’’ signs; manufactured housing communities fees, higher average home sales prices, (D) Sell the manufactured home in owned by government units or faster home sales, and access to fixed place within a reasonable time period instrumentalities, nonprofits, or rate home financing.’’ 39 Although after eviction by the manufactured residents. The final rule defines government-, nonprofit-, and resident- housing community owner; and ‘‘resident-owned manufactured housing owned communities currently make up (E) Receive at least 60 days advance community’’ as a manufactured housing a very small portion of the overall notice of a planned sale or closure of the community for which the terms and manufactured housing community manufactured housing community. conditions of residency, policies, market, more active support by the The final rule changes the proposed operations, and management are Enterprises for communities with these rule by: (1) Clarifying that Enterprise controlled by at least 51 percent of the types of ownership structures could support of financing of manufactured residents, either directly or through an encourage more communities to convert housing communities located in entity formed under the laws of the to these forms of ownership. jurisdictions with laws providing state. FHFA has changed the percentage Accordingly, consistent with the tenants with equal or greater protections of residents in this definition from 50 proposed rule, the final rule establishes than those specified in the rule is percent in the proposed rule to 51 a Regulatory Activity for Enterprise eligible for Duty to Serve credit; (2) percent in the final rule so that control support for financing manufactured making the pad lease protections by a majority of the residents would be housing communities owned by available to tenants at all times and not required for the community to be only in cases of default on rent eligible for credit, as Fannie Mae 38 See generally Millennium Housing—Mission payments; (3) reducing the advance suggested in its comment letter. Statement, available at http:// notice period for planned sale or closure A number of policy advocacy www.millenniumhousing.net/#Mission_Statement. of the community from 120 days to 60 organizations and nonprofit 39 Sally K. Ward, Charlie French & Kelly Giraud, days; and (4) not including the proposed ‘‘Resident Ownership in New Hampshire’s ‘Mobile organizations supported this proposed Home Parks:’ A Report on Economic Outcomes’’ provisions on bona fide offers of sale of Regulatory Activity because these types (rev. 2010), available at http://scholars.unh.edu/ the community. The changes are of communities play a key role in cgi/viewcontent.cgi?article=1009&context=carsey. discussed further in the sections below.

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As discussed in the SUPPLEMENTARY commenters and the Enterprises wholesale adoption of the AARP Model INFORMATION to the proposed rule, the opposing the proposed pad lease Act into tenant lease protections in the final rule does not impose requirements protections, and most consumer final rule would not be practical. on sellers and servicers to oversee advocacy groups favoring even stronger However, after considering the manufactured housing community pad lease protections. The comments, FHFA has determined that owners’ compliance with the pad lease manufactured housing industry certain modifications and clarifications protections. Also, consistent with the commenters opposed the pad lease to the proposed tenant lease protections approach in the proposed rule, the final protections because the industry prefers should be made in the final rule, which rule does not require that covenants in a funding option unconstrained by pad are discussed below. the blanket loan documents for the lease protection requirements. The Equivalent Pad Lease Protection Laws. manufactured housing community Enterprises also opposed pad lease The SUPPLEMENTARY INFORMATION to the provide that noncompliance by protections on the grounds that tenant proposed rule stated that where a community owners with the pad lease protections are better handled by the jurisdiction has laws requiring certain protections constitutes an event of state legislatures. pad lease protections for manufactured default. Instead, tenants would need to Policy advocacy organizations and housing communities that are equal to file private lawsuits to remediate any nonprofit organizations supported or greater than the minimum pad lease landlord noncompliance with the lease having tenant pad lease protections, protections in the proposed rule, provisions. either as a stand-alone Regulatory communities in those jurisdictions Both Enterprises commented that Activity, or as an eligibility requirement would be eligible for Duty to Serve manufactured housing communities that for all manufactured housing credit under the proposed Regulatory do not have the proposed pad lease community loans purchased by the Activity. The text of the proposed rule protections are able to obtain financing Enterprises. One policy advocacy referred to the protections as without Enterprise support. This is due organization supported the Enterprises’ ‘‘minimum’’ protections. Some to the current strong market for developing a standardized lease commenters apparently misunderstood manufactured housing community containing pad lease protections, and this reference and stated that there 40 financing. A policy advocacy urged that it include free speech rights could be conflicts between the proposed organization that supported having and rights of association. pad lease protections and state and local strong tenant protections as a concept A manufactured housing tenants’ pad lease protection laws. Some also expressed concern that requiring organization recommended that FHFA manufactured housing community tenant protections could deter adopt the pad lease protections owners expressed concern about the community owners from selling their contained in the American Association impact of the proposed pad lease loans to the Enterprises. FHFA notes of Retired Persons (AARP) Model Act.41 protections because they perceived that this Regulatory Activity would not The commenter further advised that 14 conflicts between these requirements require the owner of a manufactured states lack any pad lease protection laws and state and local laws, and stated that housing community to agree to these for manufactured housing community it would be inappropriate to condition lease provisions as a condition of selling tenants. The commenter expressed financing on these requirements. its loan to an Enterprise. However, if an concern that states might adopt FHFA’s FHFA did not intend that the Enterprise decided to include this proposed pad lease protections as a minimum pad lease protections in the Regulatory Activity in its Plan, the ceiling on tenant protections rather than proposed rule be a suggested ceiling for Enterprise could receive Duty to Serve as the minimum baseline that FHFA pad lease protections to be adopted by credit for those transactions with intended. A policy advocacy states or localities. Instead, FHFA community owners who did adopt the organization stated that the Enterprises intends that the pad lease protections specified lease provisions. FHFA would should use their market influence to finalized here act as a floor for tenant take into consideration market support the proposed pad lease protections in manufactured housing competition and the relative difficulty protections or those in state or local communities. The final rule clarifies of encouraging community owners to laws, whichever are more protective. this by stating explicitly that adopt these lease provisions in assessing A state housing finance agency manufactured housing communities in Duty to Serve credit. recommended including safeguards in jurisdictions with laws providing A number of commenters addressed the final rule against large rent increases tenants with equal or greater pad lease the specific tenant pad lease protections in manufactured housing communities. protections than those specified in the in the proposed rule. Commenters In developing this Regulatory Activity, Regulatory Activity are eligible for Duty clustered into two groups, with most FHFA sought to address the most to Serve credit. manufactured housing industry concerning reported practices in Right to Sell Manufactured Homes designing the tenant pad lease 40 See generally Tony Petosa, Nick Bertino & Erik and Sublease or Assign Pad Leases. The protections for the proposed and final proposed rule would have provided that Edwards, ‘‘Wells Fargo Multifamily Capital, rule 42 and has determined that Manufactured Home Community Financing upon a default by tenants on their rent Handbook,’’ pp. 5–8 (10th ed., 2d Qtr. 2016). See payments, the tenants would have the Peter Grant, ‘‘Singapore’s Sovereign-Wealth Fund Is 41 See generally Carolyn L. Carter, Odette in Talks to Buy Manufactured-Home Owner,’’ Wall Williamson, Elizabeth DeArmond & Jonathan right to: (1) Sell their home without Street Journal (June 28, 2016) (‘‘Well-capitalized Sheldon, ‘‘Manufactured Housing Community having to first relocate it out of the private equity and publicly traded REITs are eager Tenants: Shifting the Balance of Power—A Model community; (2) post ‘‘For Sale’’ signs; to acquire these properties.’’), available at http:// State Statute,’’ AARP Public Policy Institute (Rev. (3) sublease or assign their pad lease for www.wsj.com/articles/singapores-sovereign-wealth- Ed. 2004), [hereinafter cited ‘‘AARP Model Act’’], fund-is-in-talks-to-buy-manufactured-home-owner- available at http://assets.aarp.org/rgcenter/ the unexpired term without 1467106203. For a discussion of the high consume/d18138_housing.pdf. unreasonable restraint; and (4) sell their desirability of manufactured housing communities 42 See generally Darren Cunningham, ‘‘Another home within a reasonable period of time as an investment, see generally Nancy Olmsted, Mobile Home Tenant Facing $25k Lawsuit After after eviction. The final rule makes Marcus & Millichap, ‘‘Investors Competing for Selling Her Own Home,’’ Fox17online (Apr. 7, Limited Supply of Manufactured Home 2014) (Web site), available at http:// these protections available to tenants at Communities,’’ First Half 2015, Manufactured fox17online.com/2014/04/07/another-mobile-home- all times regardless of whether they Housing Research Report (2015). tenant-sued-for-25k-after-selling-her-own-home/. have defaulted on their rent payments.

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A manufactured housing industry 120-day advance notice period in the Negotiation of Community Sale. consultant supported the proposed right final rule. In view of the wide range of Under the proposed rule, as part of the for tenants to be able to sell their homes advance notice periods among the states pad leases protections, the tenants, or an in place and advertise the sale. The and to balance the needs of tenants with organization acting on behalf of a group commenter stated, however, that after the needs of community owners, the of tenants, would have the right to eviction of a tenant, the trial court judge final rule adopts a minimum advance match any bona fide offer for sale, and usually determines a reasonable period notice period of 60 days. In application, the community owner would be of time for the tenant to sell the home. the final rule makes it possible for the required to consider the tenants’ offer The commenter further noted that most 60-day advance notice period and the and negotiate with them in good faith. leases in the Midwest are verbal, month- expiration of the last pad lease term FHFA has determined that it is not to-month leases, with most tenants then in effect to expire on the same day. necessary for the rule to specify a right declining a written lease. Tenants’ Right of First Refusal. A for the tenants to make an offer to Advance Notice Period for Planned ‘‘right of first refusal’’ is a right in a purchase their community, as this right Sale or Closure of Community. Under contract where the seller must give the exists irrespective of the Duty to Serve. the proposed rule, tenants would have other party an opportunity to match the FHFA also determined that, while state had the right to receive at least 120 days price offer that a third party has made laws and the AARP Model Act 49 may advance notice of a planned sale or to buy a certain asset.46 Several specify tenant purchase rights, it is not closure of the community, within which manufactured housing trade feasible to include them in pad leases. time the tenants, or an organization associations mistakenly believed that (d) Determining Affordability of acting on behalf of a group of tenants, the proposed Regulatory Activity Manufactured Housing Communities— may match any bona fide offer of sale, included a right of first refusal for the § 1282.38(f) and the community owner must tenants to purchase their manufactured The Safety and Soundness Act consider the tenants’ offer and negotiate housing communities where the provides that Duty to Serve activities with them in good faith. communities are being sold or closed. must be for very low-, low-, and Some manufactured housing trade The proposed rule did not include a moderate-income families. organizations opposed a right for right of first refusal for tenants. Rather, Manufactured housing community advance notice to tenants of a planned the proposed rule stated that the owners and loan sellers are unlikely to sale of the community except when the ‘‘community owner shall consider the know the incomes of all of the sale involves a change in land use. In tenants’ offer and negotiate with them in community residents at the time a their view, the sale of the property does good faith.’’ 47 (emphasis added) not harm tenants because their leases blanket loan on the community is sold Many policy advocacy organizations simply transfer to the new owner. to an Enterprise. Thus, in order for an With one exception, commenters did favored including a tenants’ right of first Enterprise’s purchase of the loan to be not specifically address the length of the refusal in the Regulatory Activity, eligible to receive Duty to Serve credit, proposed advance notice period. The stating that the absence of such a right an alternative to requiring the exception was a policy advocacy is a fundamental risk to tenants. Enterprises to obtain the incomes of the organization that conducted a review of In contrast, several manufactured community residents is needed. FHFA the manufactured housing community housing trade associations stated that a has previously established a laws in all 50 states. The commenter tenants’ right of first refusal would limit methodology in 12 CFR 1282.19 for reported that only Vermont and community owners’ ability to finance determining affordability under the Connecticut have a 120-day advance and sell their communities and would Enterprises multifamily affordable notice period, that Florida, expose the Enterprises as investors. housing goals that uses the tenants’ total Massachusetts, and Rhode Island have a After considering the comments, monthly housing costs (rent payments 45-day ‘‘purchase opportunity’’ period, FHFA has determined that plus utility costs, adjusted for number of and that Oregon has a 25-day advance incorporating a tenants’ right of first bedrooms) instead of their incomes.50 notice period. The commenter refusal in this Regulatory Activity That methodology will also be used concluded that the proposed 120-day would add an overly expansive role for generally for determining the advance notice to tenants is too long the Enterprises and potentially involve affordability of multifamily properties 48 and that the other state advance notice significant implementation issues. for Duty to Serve purposes. However, periods are effective. Accordingly, consistent with the the methodology cannot be used where FHFA also considered the AARP proposed rule, the final rule does not the total monthly housing costs of the Model Act, which provides for a 90-day include a tenants’ right of first refusal in residents are not known to the property advance notice period for the sale of a the Regulatory Activity. owners or the loan sellers. For community.43 The 90-day period is manufactured housing communities, the extended by an additional 180 days 46 See The Law Dictionary (Black’s Law total monthly housing costs of the where a tenant association provides Dictionary Free Online Legal Dictionary, 2d Ed.) residents (note payments on (Web site), available at http://thelawdictionary.org/ timely notice to the community owner right-of-first-refusal/. manufactured home plus pad rent of its intent to purchase the 47 80 FR at 79217 (2015). payments plus utility costs, adjusted for community.44 The AARP Model Act 48 See generally Matthew Silver, ‘‘Lawsuit bedroom size) are generally not known provides a two-year advance notice Attempts to Block Sale of Manufactured Home to the owners of the community or the period for a change in use (i.e., closing) Community,’’ MHProNews (July 5, 2016), available loan sellers. at http://www.mhmarketingsalesmanagement.com/ 45 Accordingly, to determine the of a community. blogs/daily-business-news/lawsuit-attempts-to- Based on the commenter’s states block-sale-of-manufactured-home-community/; affordability of manufactured housing survey and the AARP Model Act, FHFA David I. Walker, ‘‘Rethinking Rights of First communities under the Duty to Serve, is persuaded to change the proposed Refusal,’’ p. 5 Stan. J.L. Bus. & Fin. 1 (1999); Joshua § 1282.38(f) of the final rule provides Stein, ‘‘Why Rights of First Offer and Rights of First that, unless otherwise determined by Refusal Don’t Work’’ (Nov. 26, 2013), available at 43 See AARP Model Act, Sec. 113(b). https://commercialobserver.com/2013/11/why- 44 See id. at Sec. 113(c). rights-of-first-offer-and-rights-of-first-refusal-dont- 49 See AARP Model Act, sec. 113(b), (e). 45 See id. at Sec. 112(b). work/. 50 See 12 CFR 1282.15(d)(1), 1282.19.

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FHFA, the affordability of homes in the prioritize low-income buyers for area median income by the median community shall be determined using purchases. An organization that assists income of the census tract in which the one of the two methodologies discussed in financing resident-owned community is located and multiplying below, as applicable, as a proxy for the communities also favored this the resulting ratio by the total number number of homes in the community that methodology, although it stated that all of homes in the community. are affordable, except that for purposes resident-owned communities should be Consistent with the proposed rule, of determining extra Duty to Serve deemed income-qualifying under the § 1282.38(f)(2) of the final rule includes credit for residential economic diversity Duty to Serve regardless of any income a methodology that uses the median activities or objectives, the methodology documentation. Neither Enterprise income of the census tract in which the in paragraph (f)(2) may not be used: commented on the questions. community is located, as determined by (1) Methodology for government-, FHFA has considered the comments FHFA, to proxy for the incomes of the nonprofit- or resident-owned and is persuaded that manufactured community’s residents. This manufactured housing communities. housing communities owned by methodology is available regardless of Section 1282.38(f)(1) of the final rule government units or instrumentalities, the type of ownership structure of the provides that, for a manufactured nonprofits, or residents generally are community. housing community owned by a driven by public missions to provide As an example of the second scenario, government unit or instrumentality, a affordable homes to very low-, low-, and if the area median income is $100,000, nonprofit organization, or the residents, moderate-income households, the census tract’s median income is if laws or regulations governing the consistent with the purposes of the Duty $125,000, and the number of homes in affordability of the community, or the to Serve. Accordingly, FHFA has the community is 100, the number of community’s or ownership entity’s determined that it is reasonable to rely homes treated as affordable is: founding, chartering, governing, or on these entities’ or communities’ Step 1: $100,000 ÷ $125,000 = 80% financing documents, require that a founding, chartering, governing, or Step 2: 80% × 100 = 80 (number of certain number or percentage of the financing documents as proxies for homes treated as affordable) community’s homes be affordable affordability of homes in the community consistent with paragraph (d)(1) of where the documents contain The final rule adopts the proposed § 1282.38, then any homes subject to restrictions that require affordability of census tract methodology’s first step for such affordability restriction are treated homes to the income groups targeted by determining the appropriate ratio of the as affordable for Duty to Serve purposes. the Duty to Serve. A manufactured area median income to the census tract The proposed rule text did not housing community will also be median income. The second step in the include this methodology but considered affordable to the income final rule multiplies that ratio by the specifically requested comment on groups targeted by the Duty to Serve if total number of homes in the whether governing or financing laws or regulations governing the community. This is a change from the documents for the community could community require that it be affordable proposed rule where step 2 would have provide a proxy for resident incomes. to such income groups. multiplied the step 1 ratio by the unpaid For those communities that are owned To facilitate Enterprise support for principal balance of the blanket loan. by government units or financing for the types of communities Duty to Serve credit under the loan instrumentalities, the proposed rule discussed above, the final rule provides purchase evaluation area is generally asked whether regulations, handbooks, the Enterprises with the option of using measured based on the number of or financing documents specifying either this methodology or the census dwelling units affordable to very low-, income criteria for the residents would tract methodology discussed below. low-, and moderate-income families. be an appropriate indicator of tenant (2) Census tract methodology for any Measuring credit for purchases of incomes. For those communities that are type of manufactured housing blanket loans on manufactured housing nonprofit-owned and resident-owned community. Section 1282.38(f)(2) of the communities based on the number of communities, the proposed rule asked final rule provides that for any type of homes in the community rather than on whether the founding documents for the manufactured housing community, the unpaid principal balance is not a community, which describe its mission except for purposes of determining extra substantive change because it will not as serving lower-income families, or credit for residential economic diversity affect the proportion of each community financing agreements or other activities or objectives,51 the that is treated as affordable. Measuring documents from funding sources affordability of the homes in the based on the number of homes is more specifying the required income levels of community is determined as follows: consistent with the evaluation methods intended beneficiaries, would be (A) If the median income of the for other types of mortgage purchases, appropriate indicators of tenant census tract in which the manufactured and it will permit easier comparisons of incomes. The proposed rule also asked housing community is located is less volumes across different mortgage whether there is any comparable than or equal to the area median purchases under the Duty to Serve. documentation that could be applicable income, then all homes in the Several commenters addressed the to communities with for-profit owners community are treated as affordable; proposed census tract methodology. A (e.g., where they have accepted income (B) If the median income of the census policy advocacy organization favored restrictions in order to accept Section 8 tract in which the manufactured the methodology, describing it as simple vouchers). housing community is located exceeds and reasonable. A trade association also These questions received few the area median income, then the supported the methodology, but comments. A nonprofit organization number of homes that are treated as preferred that a matrix with parameters stated that governing or financing affordable is determined by dividing the tailored to accommodate family stresses documents would provide a good proxy like major medical expenses be added. for the incomes of residents in limited 51 Estimating affordability under § 1282.38(f)(2) A manufactured housing tenants’ equity cooperatives (i.e., resident-owned assumes that a community’s affordability mirrors organization opposed the methodology the income characteristics of the tract in which it communities) because the land is is located, which is not useful for determining on the basis that it would not work well preserved over the long term for whether the community contributes to residential if the manufactured housing community manufactured housing, and home sales economic diversity. is located in more affluent areas or in

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commercial areas. A state housing FHFA also appreciates the suggestion It also identifies the circumstances finance agency stated that the that the proxy methodology be tailored under which eligible Duty to Serve methodology is flawed because census more to the individual financial activities may involve permanent tract, American Community Survey, and circumstances of the community’s construction take-out loans. The section HUD area median income data may not residents. However, community owners further identifies the Statutory be a good proxy for affordability. The and loan sellers would not be expected Activities enumerated for housing commenter recommended that the to know or share the personal financial projects under the Safety and chosen methodology be based on use of circumstances of each resident, making Soundness Act.55 It also discusses the actual data. Neither commenter offered tailored matrices challenging to seven Regulatory Activities identified a recommended substitute for the develop. by FHFA, which are: (1) Financing of proposed methodology and these In response to the suggestion that the small multifamily rental properties; (2) standard measures of affordability. § 1282.15(e) estimation methodology for energy or water efficiency Fannie Mae suggested instead using the housing goals 54 be used for improvements on multifamily rental the affordability estimation manufactured housing communities properties; (3) energy or water efficiency methodology for the Enterprises’ under the Duty to Serve, FHFA notes improvements on single-family, first housing goals in § 1282.15(e), which is that the housing goals methodology was lien properties; (4) shared equity available when rental data is missing,52 developed for other types of multifamily programs for affordable homeownership but did not elaborate on its reasons for rental housing. Accordingly, FHFA has preservation; (5) HUD Choice recommending that methodology. determined that the methodology Neighborhoods Initiative; (6) HUD Fannie Mae stated that it would need to established in the rule is more Rental Assistance Demonstration incur additional expenditures to appropriate to that task. program; and (7) purchase and operationalize the proposed census tract FHFA also recognizes that under the rehabilitation of certain distressed methodology. census tract methodology, the properties. Finally, the section sets out Freddie Mac did not address the Enterprises could receive Duty to Serve requirements for Additional Activities reasonableness of the proposed credit for purchases of blanket loans on that the Enterprises may propose in the methodology directly, but stated that its manufactured housing communities that affordable housing preservation market support for affordable manufactured may include some residents with for Duty to Serve credit. housing communities is confirmed by incomes exceeding the area median various measures, including the income. The methodology takes this a. Eligible ‘‘Preservation’’ Activities— proposed methodology. into account through its partial credit §§ 1282.34(b); 1282.37(b)(6), (c) An organization that specializes in calculation for manufactured housing Consistent with the proposed rule, supporting resident-owned communities in higher income census § 1282.34(b) of the final rule provides manufactured housing communities tracts. FHFA has determined that the that Enterprise activities eligible to be commented that in its many years of census tract methodology is a included in a Plan under the affordable training and financing resident-owned reasonable approach that will result in housing preservation market are communities in numerous states, it has Duty to Serve credit being provided for activities that facilitate a secondary not seen any manufactured housing manufactured housing communities that market for mortgages on residential communities in which fewer than 50 largely serve income-eligible properties for very low-, low-, or percent of homeowners earn less than households. In addition, mixed-income moderate-income families consisting of 80 percent of area median income. The communities may contribute significant affordable rental housing preservation commenter stated that 86 percent of benefits to the lower-income households and affordable homeownership homeowners in its current in the community and to the success preservation. manufactured housing community and sustainability of the community. Under the final rule, only certain portfolio earn less than 80 percent of The final rule also provides that permanent construction take-out loans area median income. The commenter FHFA may approve the use of another are eligible for Duty to Serve credit recommended, therefore, that the final methodology for determining the under the affordable housing rule treat all manufactured housing affordability of homes in a preservation market.56 Section communities as serving low- and manufactured housing community is 1282.37(c)(1) of the final rule establishes moderate-income households. appropriate. If an Enterprise believes two categories of these loans that are FHFA understands the view that that an alternative methodology would eligible for Duty to Serve credit. The manufactured housing communities be feasible and preferable to the first category is Enterprise activities overwhelmingly serve lower-income methodologies in the final rule for a related to permanent construction take- households. However, not all particular type of manufactured housing out loans for replacement properties manufactured housing communities can community transaction, the Enterprise that preserve existing subsidies on be deemed to meet the Duty to Serve should raise the matter with FHFA for affordable housing for a regulatory income requirements, as some consideration. period of required affordability. This communities are not affordable to period must be at least as restrictive as households at the Duty to Serve income 2. Affordable Housing Preservation the longest affordability restriction levels.53 Market—§ 1282.34 applicable to the subsidy or subsidies The below section describes the final being preserved. The second category is 52 See 12 CFR 1282.15(e). rule provisions for the affordable Enterprise activities related to 53 See, e.g., Tom Delavan, ‘‘America’s Most housing preservation market. The permanent construction take-out loans Glamorous Trailer Park,’’ The New York Times Style Magazine (Nov. 11, 2015), available at http:// section discusses the scope of eligible www.nytimes.com/2015/11/11/t-magazine/ preservation activities for Duty to Serve 55 12 U.S.C. 4565(a)(1)(B). paradise-cove-malibu-million-dollar-trailer- credit as including both affordable 56 A permanent construction take-out loan is a parks.html?_r=1; Deborah Jellett, ‘‘Ten of the Best rental housing preservation and long-term mortgage that replaces a short-term Luxury Trailer Parks in the World,’’ The Richest construction loan for a new property. The (Web site) (Apr. 28, 2014), available at http:// affordable homeownership preservation. Enterprises currently purchase permanent www.therichest.com/luxury/celebrity-home/ten-of- construction take-out loans but not acquisition/ the-best-luxury-trailer-parks-in-the-world/. 54 See generally 12 CFR 1282.15(e). development/construction loans.

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for housing that was developed under preventing the conversion of affordable years, beyond the date of the state or local inclusionary zoning, real properties to market rate rents at the end Enterprises’ loan purchases and, if so, estate tax abatement, or loan programs, of long-term affordability periods, what an appropriate minimum period of where the property owner has agreed to which are typically 15 years, 20 years, long-term affordability would be for the restrict a portion of the units for or 30 years, at which time major extended use regulatory agreement. occupancy by very low-, low-, or rehabilitation of the properties may be FHFA received numerous comments moderate-income families, and to needed. This is consistent with the regarding the interpretation of restrict the rents that can be charged for plain meaning of the term ‘‘preservation.’’ Commenters generally those units at affordable rents to those ‘‘preservation,’’ which is maintaining agreed that Enterprise support for populations, or where the property is something in its existing state.59 The extending long-term affordability for developed for a shared equity program concept of ‘‘preservation’’ in the rental existing rental properties should be that meets the requirements to be housing context is not generally included as ‘‘preservation.’’ However, eligible for Duty to Serve credit as understood to include new construction commenters differed on whether and to discussed below and in § 1282.34(d)(4). of rental properties. what extent FHFA should include For these loans to be eligible for Duty However, in the post-financial crisis Enterprise support for permanent to Serve credit, there must be a years, the number of renters has been construction take-out loans as regulatory agreement, recorded use expanding while the stock of affordable ‘‘preservation.’’ Both Enterprises restriction, or deed restriction in place rental housing has been shrinking. The recommended that FHFA include new that maintains affordability for the term rate of new construction of affordable construction as ‘‘preservation’’ in order defined by the state or local program. rental housing has not kept pace with to address the lack of supply of These limitations on eligible activities the demand for such housing. Further, affordable rental housing, which they related to permanent construction take- more desirable markets face particular stated cannot be met by preservation of out loans apply to Statutory, Regulatory, upward rent pressure. One way to existing properties alone. Fannie Mae and Additional Activities in this market, preserve affordability is to give Duty to did not specify whether FHFA should which are described in detail below. Serve credit for permanent construction limit the types of new construction that Permanent construction take-out take-out loans for rental properties should be eligible as ‘‘preservation’’ for loans that do not meet the requirements where long-term affordability periods Duty to Serve credit. Freddie Mac of either of these two categories are not are required by regulatory agreements, recommended that new construction for included in the final rule’s which for several federal programs are properties with regulatory agreements interpretation of ‘‘preservation’’ under set at 15 years, 20 years, or 30 years. requiring long-term affordability be the affordable housing preservation Some of the specifically enumerated considered. programs under the affordable housing market. However, such permanent Support for Including New Construction preservation market in the Safety and construction take-out loans are eligible for Replacement Properties That Soundness Act involve new for Duty to Serve credit under the Preserve Existing Subsidies manufactured housing and rural construction, which could indicate The majority of commenters who markets subject to meeting the eligibility congressional intent to include support responded to FHFA’s questions on the requirements for those markets as for new construction under this market. However, Congress may have instead interpretation of ‘‘preservation’’ and on provided in the final rule. Additional whether FHFA should provide credit for guidance on preservation activities and intended only that support for existing properties under these programs at the Enterprise support for certain affordability periods may be provided in permanent construction take-out loans FHFA’s Evaluation Guidance as point of their expiring regulatory agreements be included in the stated that they only supported new necessary. construction that preserves existing A further discussion of the final rule’s affordable housing preservation market. The proposed rule specifically subsidy under ‘‘preservation’’ for Duty provisions on permanent construction to Serve purposes. These commenters take-out loans is below. requested comment on whether the term ‘‘preservation’’ should be interpreted to included an individual, several b. Permanent Construction Take-Out allow Duty to Serve credit to be nonprofit organizations, policy Loans provided to Enterprise purchases of advocacy organizations, and governmental entities. A nonprofit As discussed in the SUPPLEMENTARY permanent construction take-out loans organization cited the complicated and INFORMATION to the proposed rule, the on new rental properties with long-term labor intensive nature of preserving Safety and Soundness Act enumerates affordability regulatory agreements that existing properties as a reason for nine statutory programs for Duty to restrict incomes and rents, and whether limiting the definition of ‘‘preservation’’ Serve credit under the affordable 15 years or some other term would be and argued that the Safety and housing preservation market, which are an appropriate minimum period of long- Soundness Act’s meaning of discussed below, but does not otherwise term affordability. The proposed rule ‘‘preservation’’ was well understood as define the term ‘‘preservation’’ for this also specifically requested comment on 57 whether the term ‘‘preservation’’ should preserving the deep affordability of market. Preservation strategies for federally-supported affordable rental affordable rental housing and be interpreted to include Enterprise purchases of refinance mortgages on housing. The nonprofit organization, homeownership differ. For affordable along with two policy advocacy rental housing, preservation in the existing rental properties with long-term affordability, and whether the organizations, cited transfers of Section affordable housing industry is generally 8 subsidy contracts, Rental Assistance understood to mean preserving the preservation activities should be required to extend the property’s Demonstration transactions, and affordability of rents to tenants in projects that use project-basing of tenant existing properties.58 This includes regulatory agreement restricting household incomes and rents for some protection vouchers and project-based vouchers as examples that would fit 57 12 U.S.C. 4565(a)(1)(B). minimum number of years, such as 10 58 This is the focus of HUD’s Office of Affordable within this category of permanent Housing Preservation (recently renamed the Office 59 See Cambridge Dictionaries Online, definition construction take-out loans. One of of Recapitalization). of ‘‘preserve.’’ these policy advocacy organizations

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commented that given the difficulty of added that permanent construction take- eligible for Duty to Serve credit. The preserving existing affordable housing out loans with longer regulatory periods commenter further suggested that FHFA stock, the Enterprises would likely should be scored higher in FHFA’s provide the bulk of the Duty to Serve choose not to engage in such activities evaluation process for the Enterprises’ credit to traditional preservation of if less difficult options were included as Duty to Serve performance. A state existing properties, stating that there is eligible activities under the Duty to housing finance agency suggested a 30- a core mission to preserve existing and Serve. The commenter, along with a year regulatory affordability period for largely irreplaceable subsidized nonprofit organization, stated that new construction, noting that the housing. Enterprise support of new construction standard for regulatory agreements is with long-term affordability restrictions considerably higher than 15 years. Support for Treating ‘‘Preservation’’ in high opportunity areas is an Another state government entity Only as Preserving Existing Properties important need, but should fall under recommended new construction A number of commenters the Enterprises’ housing goals. developments with perpetual recommended that ‘‘preservation’’ be A local government entity commented affordability restrictions as the only interpreted specifically as preserving that Duty to Serve credit the Enterprises kind of new construction that should be existing rental properties. Two receive for activities related to Choice treated as ‘‘preservation,’’ stating that individuals, two policy advocacy Neighborhood Initiative grants should the preservation of existing housing organizations, and a nonprofit include new construction for stock should be the focus of the Duty to organization commented that replacement housing units, which could Serve rule. A trade association ‘‘preservation’’ should include help the government entity with the recommended that FHFA require 50- purchasing or refinancing loans on final stages of its project through the year or ‘‘life of the building’’ regulatory existing rental properties where units program. A nonprofit organization and a affordability periods. The commenter are being converted from market rate to coalition of practitioners working with stated that it is inefficient to reinvest affordable. A nonprofit organization the Rental Assistance Demonstration public and private funds after a 15-year noted as reasons for limiting the program stated that much of the existing regulatory term expires in order to interpretation of ‘‘preservation’’ that affordable housing stock, especially recapitalize a property and retain its new construction of affordable housing public housing, is very old and beyond affordability. falls under the Enterprises’ housing the point of upgrades to modernize goals and that existing federally properties. The commenters noted that Support for New Construction Under Other Parameters supported rental housing properties are new construction would allow these often the most affordable properties Several commenters supported some subsidized properties to be replaced available in communities. Two state types of new construction under with properties that may be less dense, government entities commented that the ‘‘preservation’’ for the Duty to Serve more energy efficient, and more mixed- Enterprises already purchase subject to certain parameters other than income. Several policy advocacy permanent, multifamily construction organizations and an individual regulatory agreements requiring long- take-out loans and, therefore, do not commented that new construction term affordability periods or need Duty to Serve credit to encourage should only be considered replacement housing that preserves such activities. A number of policy ‘‘preservation’’ if Enterprise proposals existing subsidies. advocacy organizations expressed on new construction encourage A nonprofit organization, along with concern that unless new construction residential economic diversity or one of its nonprofit affiliates, that replaces existing affordable housing provide financing for replacement recommended that new construction, if being demolished is built in gentrifying housing that preserves the subsidies on included, be treated as ‘‘preservation’’ or high opportunity areas, it could existing affordable units specifically in only if it is limited to places of targeted exacerbate segregation. These policy areas of opportunity. These commenters need, such as high-needs rural regions. noted that the new multifamily The commenters expressed concern that advocacy organizations cited this construction market currently does not if new construction without such concern as a reason for opposing new appear to need additional liquidity. limitations is included as construction being part of FHFA’s ‘‘preservation,’’ it could distract from interpretation of ‘‘preservation.’’ Support for Including New Construction the challenging task of preserving After considering the comments, as With Regulatory Periods of Affordability existing affordable properties and stray discussed above, FHFA has determined Some commenters supported treating from the statutory intent of the Duty to in § 1282.37(b)(6) of the final rule that new construction with regulatory Serve. Enterprise activities related to agreements to maintain affordability as A trade association commented that permanent construction take-out loans ‘‘preservation,’’ though they differed on new construction should be counted should be treated as eligible how long the regulatory periods should under the Duty to Serve with the ‘‘preservation’’ activities under the be. Freddie Mac and a nonprofit preservation of affordability assumed affordable housing preservation market organization recommended that FHFA through the underwriting of the only if such loans meet the include as ‘‘preservation’’ new property, factors in the market, and requirements of either of two categories. construction with regulatory agreements amenities in the property and its units, The first category is permanent requiring long-term affordability. A rather than through a requirement for construction take-out loans for nonprofit organization, a policy long-term regulatory agreements, which replacement properties that preserve advocacy organization, and a trade the commenter stated could add barriers existing subsidies on affordable association supported including and compliance burdens. housing. The permanent construction permanent construction take-out loans A policy advocacy organization take-out loan must preserve existing on rental properties with long-term recommended that Enterprise support of subsidy with a regulatory period of affordability regulatory agreements as permanent financing for new required affordability that is at least as ‘‘preservation.’’ The policy advocacy construction that adds affordable restrictive as the longest affordability organization recommended a minimum housing in neighborhoods that need restriction applicable to the subsidy or affordability period of 15 years, and more affordable housing should be subsidies being preserved.

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The second category is permanent more cost-effectively across larger HUD Section 811 program and construction take-out loans for housing multifamily properties, and they may be McKinney-Vento Homeless Assistance that was developed under state or local reluctant to finance affordable rural programs, do not, at this time, lend inclusionary zoning, real estate tax multifamily housing if they believe themselves to Enterprise support, so abatement, or loan programs, where the revenues will not cover costs. FHFA does not expect the Enterprises to property owner has agreed to restrict a address these two programs in their portion of the units for occupancy by c. Statutory Activities—§ 1282.34(c) Plans for the reasons discussed below. very low-, low-, or moderate-income The Safety and Soundness Act For each Statutory Activity that is families, and to restrict the rents that provides that the Enterprises ‘‘shall addressed in their Plans under this can be charged for those units at develop loan products and flexible requirement in § 1282.32(d), the affordable rents to those populations, or underwriting guidelines to facilitate a Enterprises must describe how they where the property is developed for a secondary market to preserve housing choose to undertake the activity and shared equity program that meets the affordable to very low-, low-, and related objectives, or the reasons why requirements to be eligible for Duty to moderate-income families, including they will not undertake the activity. Serve credit as discussed below and in housing subsidized under the following The status of each statutory program, § 1282.34(d)(4). There must be a government programs: the relevant comments received, and the regulatory agreement, recorded use • The project-based and tenant-based role that the Enterprises could play in restriction, or deed restriction in place rental assistance programs under assisting each statutory program, are that maintains affordability for the term Section 8 of the United States Housing discussed below. There were relatively defined by the state or local program. Act of 1937 (42 U.S.C. 1437f); few comments on Enterprise support for Including these limited types of • The program under Section 236 of the statutory programs. permanent construction take-out loans the National Housing Act (rental and (i) HUD Section 8 Rental Assistance as eligible for Duty to Serve credit could cooperative housing for lower-income Program encourage the Enterprises to make a families) (12 U.S.C. 1715z–1); Under HUD’s Section 8 rental needed impact in the affordable housing • The program under Section preservation market, which would assistance program, property owners 221(d)(4) of the National Housing Act receive rent payment subsidies from benefit lower-income households. These (housing for moderate-income and requirements will tie permanent HUD covering the difference between displaced families) (12 U.S.C. 1715l); the market rent for a unit and the construction take-out loans under the • The supportive housing for the affordable housing preservation market tenant’s rent contribution. The proposed elderly program under Section 202 of more closely to preserving the subsidy rule specifically requested comment on the Housing Act of 1959 (12 U.S.C. on existing housing, which is difficult ways, including potential changes to 1701q); and complex to preserve, and to their underwriting and reserve • The supportive housing program for preserving long-term affordability of requirements, the Enterprises could persons with disabilities under Section affordable housing developed through extend their support for Section 8- 811 of the Cranston-Gonzalez National state or local inclusionary zoning, real assisted properties consistent with Affordable Housing Act (42 U.S.C. estate tax abatement, or loan programs. safety and soundness. 8013); Two nonprofit intermediaries and a The final rule does not make the • above requirements for permanent The programs under title IV of the trade association requested that the construction take-out loans under the McKinney-Vento Homeless Assistance Enterprises evaluate their underwriting affordable housing preservation market Act (42 U.S.C. 11361 et seq.), but only practices on loans for properties applicable to permanent construction permanent supportive housing projects supported by Section 8 subsidies and, in subsidized under such programs; particular, reconsider how they take-out loans under the manufactured • housing and rural markets. This is The rural rental housing program underwrite their reserve requirements. because the Safety and Soundness Act under Section 515 of the Housing Act of The commenters stated that the does not require ‘‘preservation’’ as a 1949 (42 U.S.C. 1485); Enterprises’ reserve requirements, by • component of the activities serving The low-income housing tax credit taking into account the risk that those markets. In addition, the (LIHTC) under Section 42 of the Internal Congress will not appropriate funds for manufactured housing and rural Revenue Code of 1986 (26 U.S.C. 42); the Section 8 program, make refinancing markets may have unique needs for new and more difficult or infeasible, or result in • construction of affordable housing Comparable state and local smaller loan amounts with less money without being tied to replacement of affordable housing programs.’’ 60 available for property rehabilitation. existing housing that preserves subsidy, Under § 1282.34(c) of the final rule, One of the nonprofit intermediaries or to housing developed under state or Enterprise activities related to emphasized that Congress has local inclusionary zoning, real estate tax facilitating a secondary market for repeatedly renewed funding for Section abatement, or loan programs, where a mortgages on housing under these 8 rental assistance and, thus, the risk of regulatory agreement, recorded use statutorily enumerated programs are Congress not appropriating Section 8 restriction, or deed restriction maintains eligible for Duty to Serve credit. funding is quite low. Several affordability of a portion of the Enterprise activities under these commenters also recommended that the property’s units for the term defined by statutory programs are referred to as Enterprises reconsider their the state or local program. For example, ‘‘Statutory Activities’’ in the final rule. underwriting requirements for rural areas have a specific need for Under § 1282.32(d) of the final rule, minimum vacancies in light of the very small multifamily properties, given the FHFA will designate a minimum low historical vacancy rates for the lower population densities in rural number of Statutory Activities and Section 8 program. communities. Developers considering Regulatory Activities in the Evaluation The final rule does not dictate specific financing affordable multifamily Guidance that the Enterprises must underwriting requirements for housing in rural areas may face consider whether to undertake. The Enterprise engagement with the Section challenges with transaction and 8 rental assistance program. FHFA operational costs, which can be spread 60 12 U.S.C. 4565(a)(1)(B). encourages the Enterprises to consider,

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in contemplating whether to make any Supplement or Rental Assistance adequately account for property tax loan product changes to support the Program contract and is, therefore, abatements and exemptions when Section 8 rental assistance program, eligible for conversion under the Rental purchasing a Section 202 loan. whether the commenters’ suggestions on Assistance Demonstration program (see The final rule does not dictate specific underwriting should be included.61 § 1282.34(d)(6) of the final rule). Finally, underwriting requirements for the Enterprises are encouraged to Enterprise engagement with the Section (ii) HUD Section 236 Interest Rate consider refinancing Section 236 202 program. FHFA encourages the Subsidy Program properties that are still receiving interest Enterprises to consider, in Under HUD’s Section 236 interest rate rate reduction payments and are still contemplating whether to make any subsidy program, HUD subsidizes the subject to the original Section 236 Use loan product changes to support the interest rate down to one percent on Restrictions. Section 202 program, whether the mortgages on multifamily properties, in commenter’s suggestions should be exchange for restrictions that keep rents (iii) HUD Section 221(d)(4) FHA Insurance Program included. at affordable levels for the term of the As described by a nonprofit mortgage, but no fewer than 20 years. HUD’s Federal Housing intermediary, where an Enterprise is The proposed rule specifically Administration (FHA) insurance considering whether to include the requested comment on ways the program under Section 221(d)(4) Section 202 program in its Plan, FHFA Enterprises could extend their support provides financing for the new encourages the Enterprise to consider for the Section 236 program. construction or substantial loan product changes allowing current A nonprofit intermediary requested rehabilitation of multifamily properties, HUD policies on the prepayment and that the Enterprises evaluate their and for permanent financing when refinancing of Section 202 Direct underwriting standards to recognize the construction is completed. The Loans.63 Further, the Enterprises are importance of rent restrictions and proposed rule specifically requested encouraged to consider the potential tenant protection requirements. comment on ways the Enterprises could eligibility of Section 202 Direct Loan Additionally, the commenter requested support properties currently funded tenants to receive an Enhanced Voucher that the Enterprises establish loan under the Section 221(d)(4) program. A which, as discussed above, is a type of purchase guidelines that recognize the nonprofit intermediary requested that Tenant Protection Voucher that can be importance of rent increase phase-in the Enterprises provide underwriting converted to project-based vouchers and periods as a way to both protect tenants clarity and flexibility in the treatment of preserve long-term eligibility upon and maximize the loan proceeds subordinate debt, which the commenter mortgage maturity.64 In addition, the available to recapitalize and preserve noted is often a feature in refinancing Enterprises are encouraged to consider the property. Section 221(d)(4) loans. underwriting the operating costs of The final rule does not dictate specific The final rule does not dictate specific providing service coordinators, who are underwriting requirements for underwriting requirements for responsible for assuring that elderly Enterprise purchases of Section Enterprise engagement with the Section residents are linked to the supportive 221(d)(4) loans. FHFA encourages the 236 program. FHFA encourages the services they need to continue living Enterprises to consider, in Enterprises to consider, in independently in Section 202 contemplating whether to make any contemplating whether to make any properties.65 loan product changes to support the loan product changes to support the Section 236 program, whether the Section 221(d)(4) program, whether the (v) HUD Section 811 Housing Program commenters’ suggestions on commenter’s suggestion should be for Disabled Households underwriting should be included. included. HUD’s Section 811 program is a Where an Enterprise is considering (iv) HUD Section 202 Housing Program capital advance and rental assistance whether to include the Section 236 for Elderly Households program for low-income disabled program in its Plan, FHFA encourages persons, which carries no debt. As the Enterprise to consider loan product HUD’s Section 202 program for low- income elderly households is a direct discussed in the proposed rule, because changes allowing tenant protection of the absence of debt, there is no vouchers to preserve the affordability of loan and capital advance program under which HUD provides construction or obvious role for the Enterprises to the Section 236 properties. Tenants in support projects funded under this Section 236 properties may be rehabilitation funds and rental subsidies. The proposed rule program, and FHFA is not aware that statutorily eligible for Enhanced the Enterprises have ever supported Vouchers, a type of Tenant Protection specifically requested comment on ways the Enterprises could support properties mortgage financing under this program. Voucher which can be project-based and The proposed rule specifically 62 currently funded under the Section 202 helps preserve long-term affordability. requested comment on ways the In addition, FHFA encourages the program. A nonprofit intermediary requested Enterprises could support the Section Enterprises to consider whether a 811 program. Several commenters Section 236 property has a Rent that the Enterprises provide underwriting guidance that is consistent mentioned this question in their comments, but did not provide specific 61 Commenters in a number of circumstances with FHA’s treatment of Section 202 addressed individual underwriting loans. Specifically, the commenter suggestions for an appropriate role for recommendations. As noted throughout, FHFA requested that the Enterprises develop the Enterprises to support projects encourages the Enterprises to consider this standards that, like FHA’s standards, funded under this program. FHFA does feedback, although FHFA also notes that this not expect the Enterprises to be able to should not be construed as an endorsement by permit Section 202 refinance loans to be FHFA of those comments and FHFA will review underwritten to the above-market rents address this program in their Plans. any underwriting guidelines as part of its review of that reflect the presence of a long-term 63 Enterprise Plans for Non-Objection. Section 8 contract. Additionally, the http://portal.hud.gov/hudportal/documents/ 62 https://www.hudexchange.info/course-content/ huddoc?id=PIH2015-07.pdf. hud-multifamily-affordable-housing-preservation- commenter requested that the 64 Id. at 6. clinics/Preservation-Clinic-Tenant-Protection- Enterprises adopt underwriting 65 http://portal.hud.gov/hudportal/HUD?src=/ Vouchers.pdf. standards that, like FHA’s standards, program_offices/housing/mfh/scp/scphome.

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(vi) McKinney-Vento Homeless Enterprise engagement with the Section housing programs.’’ 68 Consistent with Assistance Act Programs 515 program. FHFA encourages the the proposed rule, the final rule McKinney-Vento Homeless Enterprises to consider, in provides that an Enterprise may include Assistance Act programs provide contemplating whether to make any such programs in its Plan subject to supportive housing grants to help loan product changes to support the FHFA determination of whether the homeless persons, especially homeless Section 515 program, whether the programs are eligible for Duty to Serve families with children, transition to commenters’ suggestions should be credit. The proposed rule specifically independent living. Because projects included. requested comment on whether there are other state or local affordable under these programs typically do not (viii) Federal Low-Income Housing Tax housing programs for multifamily or involve debt financing, there is no Credits (LIHTCs) single-family housing the Enterprises obvious role for the Enterprises to could support that should be eligible to support projects funded under these Under the LIHTC program, investors provide developers with funds to receive Duty to Serve credit. programs, and FHFA is not aware that A state government entity and a trade the Enterprises have ever supported develop affordable rental housing properties by purchasing the association requested that the mortgage financing under these Enterprises provide a secondary market programs. developers’ tax credits (LIHTC equity). LIHTC projects also often have loans for seasoned loans made by state The proposed rule specifically housing trust funds, state housing requested comment on ways the (debt) that are eligible for purchase by the Enterprises, like any other finance agencies, and other state and Enterprises could support McKinney- local lending programs. The trade Vento Homeless Assistance Act multifamily property. LIHTC properties have long-term regulatory use association and several civil rights programs. State housing finance organizations commented that the agencies and their trade organization agreements requiring the housing to remain affordable for very low- or low- Enterprises could do more to assist state mentioned this question in their and local programs that support comments, but did not provide specific income households for the specified long-term retention period. neighborhood revitalization activities. A suggestions for an appropriate role for nonprofit intermediary and a policy the Enterprises to support projects FHFA interprets the Duty to Serve statutory provision for the LIHTCs to advocacy organization expressed funded under these programs. FHFA concern that some state and local does not expect the Enterprises to be apply to debt, as it requires the Enterprises to ‘‘develop loan products programs provide very little subsidy, able to address these programs in their and requested that FHFA set up a and flexible underwriting guidelines to Plans. review process for determining which facilitate a secondary market’’ to programs should qualify under this (vii) USDA Section 515 Rural Housing preserve LIHTC-subsidized properties.66 Statutory Activity. The nonprofit Program Accordingly, Duty to Serve credit under intermediary also requested that FHFA this Statutory Activity is limited to Under the USDA Section 515 limit Duty to Serve credit to only the Enterprise support for debt on LIHTC- program, USDA provides direct loans portion of a mixed-income multifamily subsidized properties. The Enterprises and rental assistance to develop rental rental property that is deemed offer specialized loan purchase housing for low-income households in affordable to income-eligible programs to refinance and rehabilitate rural locations. The proposed rule households. specifically requested comment on ways existing LIHTC properties in Based upon a review of the the Enterprises could extend their conjunction with extending their comments, FHFA encourages the support for the Section 515 program. regulatory use agreements, and are an Enterprises to consider including in Multiple nonprofit organizations, important source of financing for their Plans state or local programs that policy advocacy groups, state preservation of older LIHTC projects. provide subsidized housing to very government entities, and trade Commenters had no specific suggestions low-, low-, and moderate-income associations urged greater Enterprise on new approaches the Enterprises families. If an Enterprise chooses to participation in supporting financing for could take to further support debt on include a state or local affordable rehabilitating Section 515 multifamily projects that have received LIHTC housing program in its Plan, the properties. A state government entity equity investment. Enterprise must provide a sufficient requested that the Enterprises support Pursuant to a different Duty to Serve explanation of how the program is financing rehabilitation of Section 515 statutory provision on investments and comparable to one of the other statutory properties that remain subject to the grants 67 and under § 1282.37(b)(5), programs in § 1282.34(c) discussed Section 515 use restrictions. A policy LIHTC equity investments by the above in the way it provides subsidy advocacy organization requested that Enterprises in rural areas are eligible for and preserves affordable housing for the the Enterprises consider allowing small Duty to Serve credit under certain income-eligible households. If FHFA Section 515 properties to be bundled circumstances. This is discussed further determines that the program is not and financed together, making use of below in the rural markets section. comparable, FHFA will object to economies of scale, in order to help (ix) Comparable State and Local including it under this Statutory preserve the properties’ affordability. Affordable Housing Programs Activity. Several nonprofit intermediaries and a As discussed in the proposed rule, state government entity requested that In addition to the specifically- examples of comparable state and local the Enterprises consider purchasing enumerated programs in the Safety and programs for single-family affordable loans where an existing Section 515 Soundness Act discussed above, the Act housing that could receive Duty to Serve mortgage is being re-amortized in order provides that the Enterprises shall credit under this Statutory Activity to maintain the financing when the facilitate a secondary market for include local neighborhood stabilization Section 515 mortgage is subordinated to ‘‘comparable state and local affordable programs that enable communities to the new debt. address problems related to mortgage The final rule does not dictate specific 66 See 12 U.S.C. 4565(a)(1)(B)(viii). underwriting requirements for 67 See 12 U.S.C. 4565(d)(2)(D). 68 See 12 U.S.C. 4565(a)(1)(B)(ix).

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foreclosure and abandonment through stated in the Safety and Soundness Act financing is provided by community the purchase and redevelopment of and in § 1282.37(b)(1) of the final rule, development financial institutions foreclosed or abandoned homes for very and as discussed in the SUPPLEMENTARY (CDFIs), insured depository institutions, low-, low-, or moderate-income INFORMATION to the proposed rule, or federally insured credit unions, each households. Examples of comparable Enterprise grant contributions to the of whose total assets do not exceed $10 state and local programs for multifamily National Housing Trust Fund and the billion. This is a change from the affordable housing that could receive Capital Magnet Fund, as well as proposed Regulatory Activity, which Duty to Serve credit include support for Enterprise mortgage purchases funded would have required Enterprise state low-income housing tax credit with such grant amounts, are not purchase and securitization of loan programs, programs for redevelopment eligible activities to receive Duty to pools backed by existing small of government-owned land or buildings Serve credit.70 The feedback from multifamily rental properties from as affordable multifamily housing, and commenters raised several points of CDFIs, community financial inclusionary zoning requirements for clarification about when FHFA may institutions, or federally insured credit multifamily housing.69 award Duty to Serve credit for unions, each of whose total assets are For purposes of considering and Enterprise mortgage purchases when the within an inflation-adjusted asset cap of addressing comparable state and local underlying property has received $1.123 billion ($1.128 billion with 2016 programs in their Plans, the Enterprises Housing Trust Fund or Capital Magnet inflation adjustment),71 where the loan clearly cannot be expected to consider Fund funding. pools are backed by existing small the many state and local affordable FHFA may provide Duty to Serve multifamily rental properties. housing programs operating throughout credit for an eligible activity under this Consistent with the proposed rule, the country. However, FHFA encourages final rule—such as supporting the § 1282.1 of the final rule defines ‘‘small the Enterprises to make a reasonable Regulatory Activity of small multifamily multifamily property’’ to mean a effort to consider a cross-section of housing—where the property property with 5 to 50 rental units. The programs across the country. underlying an Enterprise mortgage purpose of this Regulatory Activity is to purchase happens to have received Other Federal Affordable Housing increase the volume of small Housing Trust Fund or Capital Magnet Programs multifamily lending, and to increase the Fund funding through a source other number of smaller lenders that the The proposed rule specifically than the Enterprise. The Safety and Enterprises work with on small requested comment on whether there Soundness Act states that FHFA may multifamily lending. are other federal affordable housing award Duty to Serve credit ‘‘only to the The proposed rule specifically programs that the Enterprises could extent that such purchases by the requested comment on whether support that should receive Duty to enterprises are funded other than with Enterprise purchase and securitization Serve credit. Commenters including such grant amounts [Housing Trust of loan pools backed by existing small nonprofit intermediaries, trade Fund and Capital Magnet Fund].’’ This multifamily properties from small associations, policy advocacy language prohibits FHFA from lenders should be a Regulatory Activity. organizations, and state government providing any Duty to Serve credit if an A number of commenters, including entities provided suggestions about Enterprise were to use Housing Trust affordable housing nonprofit many additional federal programs. The Fund or Capital Magnet Fund grant organizations and trade organizations of most common federal affordable amounts to fund the Enterprise’s lenders, generally supported a housing program identified by multiple mortgage purchase. However, while the Regulatory Activity to encourage small nonprofit intermediaries, trade Enterprises provide assessments toward multifamily property lending because associations, and policy advocacy the Housing Trust Fund and Capital small multifamily buildings are an organizations was the USDA Section Magnet Fund, there are no instances important source of affordable housing 538 program. A trade association and a where the Enterprises use these grant that is often unsubsidized. Both policy advocacy organization identified amounts to fund their own mortgage Enterprises commented that support for the USDA Section 514 and 516 purchases. programs, and a nonprofit intermediary small multifamily property lending identified the Section 184 Indian d. Regulatory Activities—§ 1282.34(d) should be an Additional Activity rather Housing Loan Guarantee Program. Consistent with the proposed rule, than a Regulatory Activity. In the rural markets discussion under § 1282.34(d)(1)–(6) of the final rule Asset Cap Level § 1282.35(c) below, FHFA has identifies six specific affordable housing specifically identified these programs as preservation activities as Regulatory The proposed rule also specifically examples of programs eligible for Duty Activities. In addition, § 1282.34(d)(7) of requested comment on whether the to Serve credit under the rural the final rule includes a new affordable proposed definitions of ‘‘community Regulatory Activities where the loans housing preservation Regulatory development financial institution,’’ are made to very low-, low-, or Activity for Enterprise support for ‘‘community financial institution,’’ and moderate-income families as defined lending programs for purchase or ‘‘federally insured credit union’’ subject under the Duty to Serve. rehabilitation of certain distressed to the proposed $1.123 billion asset cap Several nonprofit organizations and properties. The seven Regulatory sufficiently capture smaller banks and policy advocacy organizations identified Activities are discussed below. community-based lenders for Duty to the National Housing Trust Fund and Serve purposes. A number of Capital Magnet Fund as federal (i) Small Multifamily Rental commenters generally supported the affordable housing programs that should Properties—§ 1282.34(d)(1) proposed asset cap level. be eligible for Duty to Serve credit. As Section 1282.34(d)(1) of the final rule A nonprofit real estate developer establishes a Regulatory Activity for stated that CDFIs should not be subject 69 Inclusionary zoning refers to local government Enterprise support for financing small planning ordinances that require a specified portion of the units in newly constructed housing to be multifamily rental housing, where the 71 See 81 FR 9196 (Feb. 24, 2016) (FHFA Notice reserved for and affordable to very low- to of annual inflation adjustment for community moderate-income households. 70 See 12 U.S.C. 4565(d)(4). financial institutions).

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to any asset cap but did not provide a increasing the volume of small Although FHFA expects that the reason. multifamily loan purchases. primary way the Enterprises will Freddie Mac and an unaffiliated The CFPB definition raises the same implement this Regulatory Activity is individual commenter opposed the issue. The CFPB definition of ‘‘small through purchase and securitization of proposed asset cap level. The individual creditor’’—an institution with less than pools from lenders, FHFA recognizes stated that the predominant lenders for $2 billion in assets—would add that there are multiple ways to support small multifamily properties are approximately 241 eligible banks and an small multifamily housing, and that the commercial banks and thrifts with additional $12 billion in potential limitation in the proposed rule is not assets of $2 billion to $10 billion, that multifamily assets. Of these 241 needed. The higher asset cap will give the proposed asset cap level would be additional banks, only 25 have at least the Enterprises the flexibility to increase impractically small and cost-inefficient, $100 million each in multifamily assets. small multifamily lending in whatever and that it would not significantly In contrast, if the asset cap in the FRB way is most efficient for them that increase the Enterprises’ purchases of definition of ‘‘community banking broadens the market of small loans on small multifamily properties. organization’’—an institution with $10 multifamily mortgage loan sellers. Freddie Mac expressed a similar billion or less in total consolidated concern, noting that there are over 5,000 assets—were used, approximately 6,000 (ii) Energy or Water Efficiency banks that would fall within the banks would be eligible, and these Improvements on Multifamily proposed cap, but that only 19 of those banks have a combined $108 billion in Properties—§ 1282.34(d)(2) banks have more than $100 million each multifamily assets. Of these 6,000 Section 1282.34(d)(2) of the final rule in multifamily assets, which Freddie banks, approximately 174 have at least establishes a Regulatory Activity for Mac identified as the amount of $100 million each in multifamily assets. Enterprise support for financing of multifamily assets necessary to support For these reasons, FHFA is adopting energy or water efficiency sustainable pooling or securitization an asset cap of $10 billion in the final improvements on multifamily rental models. Freddie Mac recommended rule. The final rule also replaces the properties, with several modifications instead that the final rule use the asset reference to ‘‘community financial from the proposed rule discussed below. cap level in the Federal Reserve Board’s institutions’’ in the proposed rule with Under the revised Regulatory Activity, (FRB) definition of ‘‘community banking the broader term ‘‘insured depository Enterprise support for financing of organization,’’ which includes financial institutions’’ and includes a definition energy or water efficiency institutions with $10 billion or less in of the latter in § 1282.1. improvements is eligible for Duty to total consolidated assets.72 FHFA recognizes that this increase in Serve credit provided there are FHFA finds compelling the comments the asset cap for smaller multifamily projections made based on credible and that the proposed $1.123 billion asset lenders may create an incentive for the generally accepted standards that (1) the cap should be increased. Because the Enterprises to increase their activities improvements financed by the loan will goal of this Regulatory Activity is to with lenders whose assets are closer to reduce energy or water consumption by encourage financing for small the asset cap. To ensure that there are the tenant or the property by at least 15 multifamily properties, if the asset cap incentives for the Enterprises to increase percent, and (2) the utility savings is so low that the entities actually their activities with smaller lenders, generated over an improvement’s originating loans on small multifamily including CDFIs, § 1282.35(c)(3) of the expected life will exceed the cost of properties would not be able to qualify, final rule, discussed below, establishes installation. then any impact on the small a new Regulatory Activity for Enterprise Lowering energy and water use in multifamily market would be de activities with financial institutions multifamily rental buildings will reduce minimis. with less than $304 million in assets in the total amount that tenants spend for In analyzing what an appropriate rural areas. the energy and water that they use, thus asset cap level should be for financial reducing their utility consumption. This Purchase and Securitization of Loan institutions in this Regulatory Activity, can be considered ‘‘preservation’’ under Pools FHFA considered the definitions of the affordable housing preservation small financial institutions/community The final rule does not include the market because housing costs are banks from the CRA ($304 million), requirement in the proposed Regulatory typically defined as rent plus utility CFPB ($2 billion), FRB ($10 billion), and Activity for purchase and securitization costs. Thus, savings in utility OCC ($1 billion). Because the feedback of loan pools backed by existing small consumption that reduce utility about the proposed asset cap level was multifamily rental properties. FHFA expenses may help maintain the overall that it was too low, both the CRA and recognizes that purchase and affordability of rental housing for OCC definitions would also be securitization of loan pools is just one tenants. problematic as $304 million and $1 means to accomplish Enterprise The proposed rule specifically billion, respectively, are even lower purchases of small multifamily requested comment on whether than the proposed $1.123 billion cap. In mortgage loans. The Enterprises have Enterprise support for multifamily considering the FHFA, CFPB, and FRB the expertise to determine the best properties that include energy efficiency definitions, FHFA analyzed bank call method for purchasing small improvements resulting in a reduction report data to see how many banks multifamily mortgage loans. FHFA has in the tenant’s energy and water would be eligible under each definition. determined that it should not dictate to consumption and utility costs should be FHFA’s analysis validated Freddie the Enterprises a particular loan a Regulatory Activity. A significant Mac’s comment that FHFA’s proposed purchase channel, but rather has set the number of nonprofit organizations, trade $1.123 billion asset cap is likely not overall objective through the Regulatory associations, government entities, and high enough to support substantially Activity, leaving the specific process to affordable housing advocacy the discretion of the Enterprises. This is organizations supported making 72 See Board of Governors of the Federal Reserve consistent with the treatment of other Enterprise support for financing of System, Supervisory and Regulation Letter, SR 13– Regulatory Activities in the final rule, energy improvements on multifamily 14 (July 8, 2013), available at https:// www.federalreserve.gov/bankinforeg/srletters/ for which FHFA does not dictate a rental properties a Regulatory Activity sr1314.pdf. particular loan purchase channel. because of their experience

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demonstrating that energy efficiency actual tenant utility consumption. A savings. Immediate verifications would and water conservation improvements nonprofit organization with energy not be possible because the long-term, help to preserve affordable housing. expertise asserted that low-income weather-normalized post-retrofit data households that are financially needed for comparison with pre-retrofit Credible Projections constrained to very low utility usage data will likely not be available for at The final rule provides that under this might increase usage to a more normal least one year. Moreover, obtaining the Regulatory Activity, the projections of level once energy or water requisite tenant utility usage data would energy or water savings must be made improvements are installed. In require the property owner to get based on credible and generally increasing their utility consumption, permission from the utility companies accepted standards that the financially constrained households may and employ sampling techniques, which improvements will reduce energy or enhance their quality of life while is further complicated because utility water consumption by at least 15 maintaining the same level of utility companies across the country do not percent. This is a change from the expenses. As the commenter pointed consistently capture or store this data. proposed rule, which would have out, because a comparison of utility Additionally, the Enterprises have little required that there be ‘‘verifiable, usages would not account for tenants’ ability to monitor and adjust for tenant reliable projections or expectations’’ of reactions to improvements, inspectors utility usage. As a result, a comparison reductions in consumption. might wrongly assume that the of projected and actual tenant utility The proposed rule specifically improvements failed to address energy consumption could be inaccurate requested comment on whether the or water inefficiencies when in reality through no fault of the lender, energy Enterprises should require the lender to the improvements’ effects were offset by auditor, or Enterprise. verify before the closing of an energy tenants’ increasing their utility usage to Instead, as recommended by some improvement loan that there are reliable a more normal level. and verifiable projections or commenters, FHFA finds that if a A nonprofit organization with energy multifamily property meets a credible expectations that the proposed energy expertise recommended instead that the improvements will likely reduce the and generally accepted standard, such Enterprises require verification that the as the U.S. Green Building Council’s tenant’s energy and water consumption energy and water improvements were and utility costs and, if so, what Leadership in Energy and installed as specified in an energy audit. Environmental Design (LEED), standards of reliability, verifiability and Other nonprofit organizations and likelihood of reduced consumption and EarthCraft, Greenpoint, the National Freddie Mac supported relying on Green Building Standard (NGBS), or the costs should be required. The proposed credible projections by third-party U.S. Environmental Protection Agency’s rule also asked whether the Enterprises certifiers and utilizing accepted (EPA’s) ENERGY STAR certifications, or should be required to verify, after the industry standards, such as a recognized other standards that may be developed closing of an energy improvement loan, point value system or a list of acceptable that are credible and generally accepted, that the energy improvements financed energy improvements. Additionally, then a projected reduction of at least 15 actually reduced the tenant’s energy and both Enterprises advocated for Duty to percent in energy or water consumption water consumption and utility costs Serve credit for properties that achieve can reasonably be assumed under the and, if so, how the Enterprises could a green building certification and, standard. Additionally, FHFA finds that verify this. therefore, meet a standard for high if a property undergoes an energy audit Although it was not the intent of the energy efficiency. proposed Regulatory Activity to require For properties not earning a green that meets a credible and generally verification of energy or water savings certification, nonprofit organizations accepted standard, such as the after installation of the improvements, a and policy advocacy organizations American Society of Heating, number of trade associations, policy generally supported requiring a one- Refrigerating, and Air-Conditioning advocacy organizations, and affordable time energy assessment/audit that meets Engineers (‘‘ASHRAE’’) Level II Energy housing providers stated that the rule a national certification standard and is Audit, and the audit shows a projection should not include such a requirement, conducted by a qualified third-party of at least a15 percent reduction in citing the practical issues involved. certifier, utility company, or state/local energy or water consumption, then the Commenters pointed out that agency in order to avoid having to project will be eligible for Duty to Serve demonstration by a property owner of conduct a baseline assessment and a credit. an immediate reduction in utility follow-up assessment to verify actual Accordingly, § 1282.34(d)(2) of the consumption was impractical because it savings. A nonprofit organization final rule replaces the reference to requires comparing long-term, weather- recommended that the scope of the ‘‘verifiable, reliable projections or normalized, pre-retrofit and post-retrofit energy audit vary based on the type and expectations’’ in the proposed rule with usage data. Freddie Mac questioned the extent of the improvements in order to ‘‘projections made based on credible availability of the requisite usage data lower project costs and maintain the and generally accepted standards.’’ since utility companies generally do not cost effectiveness of smaller Utility Savings Exceed Upfront share energy consumption figures, for improvements. Installation Costs privacy and operational reasons. Post- A trade association opposed requiring retrofit verification is particularly energy audits and utility benchmarking, The final rule provides that under this problematic when a property is claiming that audits or benchmarks Regulatory Activity, the reduced utility undergoing major renovations and no would prove challenging and cost savings generated over an baseline usage level is readily available. prohibitive. improvement’s expected life must be Freddie Mac and a trade association FHFA agrees with the commenters projected to exceed the upfront costs of pointed out that a post-loan verification that an after-the-fact verification its installation. This is a change from requirement would be further requirement would be impractical and the proposed rule, which would have complicated by the Enterprises’ inability overly burdensome. As many required that the reduced consumption to monitor and adjust for tenant utility commenters noted, there are several in a project offset the upfront costs of usage behavior, resulting in inaccurate practical issues with post-loan the improvement within a reasonable comparisons between projected and verifications of energy and water time period.

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The proposed rule specifically whether or not they yield a long-run not include such a requirement because requested comment on whether a positive return to the property owner, there is no practical way for the ‘‘reasonable time period’’ should be not on the length of their payback Enterprises to undertake this defined, and, if so, how. Nonprofit periods. responsibility. organizations, trade associations, and For these reasons, in a change from Reduction of Energy or Water affordable housing advocacy groups the proposed rule, the Regulatory Consumption by Tenant or Property stated that since the payback period for Activity in the final rule provides that energy efficiency improvements can the reduced utility savings generated The final rule includes in this vary widely depending on the type of over an improvement’s expected life Regulatory Activity a requirement that improvements and geographic location must exceed the cost of installation. the energy efficiency improvements of the property, requiring a specified Demonstrating that an energy reduce energy or water consumption by payback period could arbitrarily limit improvement is cost-effective will only the tenant or the property by at least 15 what energy efficiency improvements be required for projects undergoing an percent. This is a change from the lenders are willing to finance. As a energy audit that meets a national proposed rule, which would have result, cost-effective improvements that standard, because the other methods of applied the requirement only to would significantly improve property credibly demonstrating reduction in reductions in energy and water performance over the long term might energy and water consumption are consumption by the tenant and not by not be financed because of long payback presumed to show that the the property as a whole. periods. Other trade associations and improvements are cost-effective. Several nonprofit organizations stated nonprofit organizations criticized a that energy efficiency improvements Savings Offset by Higher Rents or Other would provide benefits to tenants from specified payback period requirement as Charges potentially eliminating cost-effective living in an upgraded property, such as long-term improvements because of The final rule does not include the improved health, savings on monthly smaller short-term savings. proposed requirement in this Regulatory utility bills, and increases in the value Based on these concerns, a number of Activity that the reduced utility costs of the property. Further, the trade associations and nonprofit derived from reduced consumption improvements would likely provide organizations recommended instead that must not be offset by higher rents or greater stability in the affordable the Regulatory Activity require a other charges imposed by the property housing market and decrease the size of Savings-to-Investment Ratio (SIR), a owner. future rent increases resulting from common benchmark among energy Several nonprofit organizations, both increases in energy or water costs. efficiency programs, which allows Enterprises, an organization with energy Several trade associations, policy financing as long as the lifetime utility efficiency expertise, and a trade advocacy organizations, and nonprofit savings exceed or are equal to the association raised concerns about the organizations recommended revising the installation costs. The commenters practicality and desirability of the proposed Regulatory Activity to provide pointed out that a SIR equal to or greater proposed restriction on increases in Duty to Serve credit not only for a than one suggests that the energy rents or other charges. Commenters reduction in energy and water efficiency improvements are cost- stated that the proposed restriction consumption by the tenant, but also by effective. would likely remove the incentive for the property as a whole. The FHFA agrees that the improvements property owners to improve their commenters stated that measuring a should be cost-effective in order to properties, diminishing the number of reduction in energy and water receive Duty to Serve credit. One way to properties potentially undergoing consumption only by the tenant could measure this is to use a SIR or other upgrades. Consequently, rather than miss energy and water savings in recognized measure to demonstrate helping tenants, the proposed restriction common areas of multifamily buildings whether the energy efficiency could reduce the potential benefits and remove the incentive for property improvements can provide value to tenants would receive from living in an owners to improve their properties. property owners over the upgraded property, such as improved After considering the comments, improvement’s expected life. This health and savings on their monthly FHFA finds the arguments compelling would allow for Duty to Serve credit as utility bills. FHFA finds these that the proposed requirement would long as the savings generated over an comments persuasive and, therefore, has likely remove the incentive for property improvement’s life exceed or are equal not included the proposed restriction on owners to improve their properties, to the cost of its installation. A SIR of increases in rents or other charges in the thereby diminishing the benefits to the greater than one ensures that the present final rule. tenants and hindering affordable value of energy savings exceeds the FHFA notes that tenants who are housing preservation. For these reasons, present value of the cost of installation responsible for paying utilities costs the Regulatory Activity in the final rule and, thus, yields a positive return. As a could still be subject to an increase in includes reductions in energy or water methodology common to energy their rents or other charges. FHFA consumption by the tenant or the efficiency programs, the SIR’s benefits expects the Enterprises to design and property as a whole. are well understood among energy implement their energy efficiency When an Enterprise is considering efficiency experts. improvement loan programs under this whether to include this Regulatory A key benefit of any cost-benefit Regulatory Activity to ensure the Activity for energy efficiency analysis such as the SIR is that it avoids preservation of affordable housing, improvements on multifamily rental arbitrarily defined payback periods, which includes affordable energy costs. properties in its Plan, FHFA encourages which could eliminate cost-effective FHFA considered requiring the the Enterprise to specifically consider energy improvements that take longer to Enterprises to use their quality control objectives related to collecting utility realize the full savings. Decreasing systems to monitor rental properties usage data and utility benchmarking. property owners’ costs can help receiving energy efficiency FHFA finds that utility benchmarking preserve affordable housing. It follows improvements in order to ensure that creates a wide variety of benefits for that energy efficiency improvements the properties’ rents remain affordable owners, tenants, and the public. Utility should be assessed on the basis of over time. However, the final rule does benchmarking helps building owners

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discover billing errors and (iii) Energy or Water Efficiency a single-family property is to undergo an malfunctioning equipment which, once Improvements in Single-Family, First energy audit that meets a generally corrected, can result in immediate Lien Properties—§ 1282.34(d)(3) accepted standard, such as the Home financial savings. Collecting utility data Section 1282.34(d)(3) of the final rule Energy Rating System, the Department can also save tenants money by establishes a Regulatory Activity for of Energy’s Home Energy Scoring Tool, identifying areas where they can realize Enterprise support for financing energy or an audit conducted by a qualified savings and enhance comfort. The EPA or water efficiency improvements on auditor/assessor trained and certified by currently offers free utility the state or the Building Performance single-family, first lien properties, with 75 benchmarking software—Energy Star similar modifications from the proposed Institute. In order to receive Duty to Portfolio Manager—to collect and Serve credit through the use of an 73 rule as made for the Regulatory Activity analyze utility data. Additionally, a for energy efficiency improvements on energy audit, the assessment needs to multifamily Energy Star Score, which multifamily properties discussed above. show a projection of at least a 15 compares a multifamily building’s Under this revised Regulatory Activity, percent reduction in energy or water energy and water use intensity to like Enterprise support for financing of consumption. A number of nonprofit, trade buildings, is available from EPA for energy or water efficiency association, and state government buildings with greater than 20 units. improvements is eligible for Duty to entities noted, however, that requiring Serve credit provided there are Efficiency Improvements That Reduce very low-, low-, and moderate-income projections made based on credible and Energy or Water Consumption families to verify savings by paying for generally accepted standards that (1) the The final rule includes in this an energy audit, which typically costs improvements financed by the loan will Regulatory Activity a requirement that $300–$600, is likely to inhibit Duty to reduce energy or water consumption by the energy efficiency improvements Serve program participation. the homeowner, tenant, or the property reduce energy or water consumption by Additionally, for households that can by at least 15 percent, and (2) the utility at least 15 percent. This is a change afford an energy audit, requiring one in savings generated over an from wording of the proposed rule, all cases would likely limit Duty to improvement’s expected life will exceed which was interpreted by some Serve credit to only energy efficiency the cost of installation. commenters to require that the energy improvements occurring as part of a As with multifamily rental properties, efficiency improvements reduce both major single-family property preservation of affordable single-family energy and water consumption by at rehabilitation that would justify the properties (homeownership or rental) least 15 percent. upfront costs of the improvements. may also encompass lowering home Both Enterprises recommended Nonprofit organizations recommended energy and water costs. Lowering energy making this change. Fannie Mae stated allowing homeowners to utilize one of and water costs can help a homeowner that many quality projects would not be the many successful state, local, tribal, or tenant to continue to afford mortgage able to reduce both energy and water or utility energy savings programs for or rent payments, as well as other consumption at the same time because which they may qualify. A state housing housing costs. improvements typically are undertaken finance agency commented that The comments on this Regulatory addressing only one of these types of partnering with state and local programs Activity mirrored the comments that consumption at a given time. Freddie has the potential to provide additional FHFA received on corresponding Mac stated that energy and water are resources to benefit low-income requirements for the Regulatory Activity separate utilities, and their consumption homeowners while simultaneously for energy efficiency improvements on involves distinct behaviors and reducing risk to the Enterprises. An multifamily rental properties discussed technology. Freddie Mac further stated FHFA analysis of successful state, local, above. a belief that FHFA’s intent was to tribal, and utility programs shows that promote both energy and water Credible Projections almost all of them have well-established efficiency improvements, but not to lists of qualifying products or require the achievement of both As addressed above in the discussion of the Regulatory Activity for energy methodologies that generate energy simultaneously. savings and reduce consumption. These FHFA’s intent was not to mandate efficiency improvements on multifamily properties, there are two types of lists would streamline the process of that the improvements address both demonstrating credible savings and energy and water consumption at the credible and generally accepted standards for projecting energy savings present homeowners with options for same time. Instead, any energy or water implementing improvements that are improvements could be used to project of 15 percent or more from energy efficiency improvements on the projected to bring them predictable a reduction in the respective utility energy savings. consumption by at least 15 percent. property—a certification such as LEED or EPA ENERGY STAR, and energy FHFA finds the comments compelling FHFA recognizes that requiring for including this third option for audits.74 reductions in both energy and water projecting energy savings in the These certifications and energy audits efficiency might arbitrarily restrict cost- Regulatory Activity for energy efficiency may also be used to project energy effective improvements that address improvements on single-family savings under the Regulatory Activity only energy- or water-related properties. This could help expand the for energy efficiency improvements on inefficiencies. Accordingly, the availability and use of energy efficiency single-family properties. A credible and reference in the proposed Regulatory improvement loan products and, thus, generally accepted standard for Activity to reducing energy and water help preserve affordable single-family demonstrating energy improvements on consumption is changed in the final rule housing. FHFA expects the Enterprises to reducing energy or water 74 A manufactured home that has met a credible to use their quality control systems to consumption. and generally accepted standard for projecting energy savings, such as the Energy Star 75 See, for example, qualified assessors permitted 73 https://www.energystar.gov/buildings/facility- certification, would be eligible for Duty to Serve for FHA’s Energy Efficient Mortgage Program at owners-and-managers/existing-buildings/use- credit under this energy efficiency Regulatory http://portal.hud.gov/hudportal/HUD?src=/ portfolio-manager. Activity. program_offices/housing/sfh/eem/energy-r.

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monitor the quality of state, local, tribal, organization or state or local believe renters’ needs are more acute and utility programs to ensure that these government entity administering the than homebuyers’ needs. programs effectively encourage cost- program. The program administrator FHFA has considered these comments effective improvements. uses its share of the appreciation to and has decided to adopt the Regulatory make the same home affordable to a Activity in the final rule for shared (iv) Preservation of Long-Term subsequent income-eligible homebuyer. equity homeownership. While Affordable Homeownership Through In the shared appreciation model, the multifamily rental housing is an Shared Equity Programs— administering entity may form a essential part of affordable housing § 1282.34(d)(4) partnership with a for-profit lender that preservation, FHFA does not interpret For affordable homeownership, there provides shared appreciation loans if the statute as being limited to are no regulatory agreements similar to the nonprofit organization or state or preservation of affordable rental those with affordable rental properties local government entity does not itself housing. In addition, the multifamily that expire after certain regulatory make qualifying loans. and single-family business units in both periods, such as 15 years, 20 years, or Resale restriction programs and Enterprises are sufficiently distinct from 30 years. Rather, preservation for shared appreciation programs have the each other that establishing a Regulatory affordable homeownership entails following common characteristics Activity for affordable homeownership ensuring that the price of the home is specified in the final rule: preservation should not materially affordable over a long-term period to (1) Provide homeownership detract from Enterprise efforts to initial and subsequent purchasers, opportunities to very low-, low-, or preserve the affordability of multifamily whether purchasing a newly moderate-income families; rental housing. constructed home or an existing home. (2) Utilize a ground lease, deed The academician commented that Certain shared equity programs, which restriction, subordinate loan or similar Duty to Serve credit should be based on offer this type of sustainable affordable legal mechanism that includes a successful homeownership rather than homeownership, fit within the final provision that the program will keep the homeownership creation. Among the rule’s interpretation of ‘‘preservation.’’ home affordable for subsequent very main reasons that FHFA has chosen to Consistent with the proposed rule, low-, low-, or moderate-income families, encourage shared equity models in the § 1282.34(d)(4) of the final rule an affordability term of at least 30 years Duty to Serve is that risk mitigation, establishes a Regulatory Activity for after recordation, a resale formula that sustainability, and affordability for the Enterprise activities related to affordable limits the homeowner’s proceeds upon new homebuyer are built into the shared homeownership preservation through resale, and a preemptive option for the equity product design. shared equity programs. The approach program administrator or its assignee to Several commenters urged FHFA to to shared equity in the final rule closely purchase the homeownership unit from include an explicit homeownership tracks the proposed rule approach, with the homeowner at resale; and counseling requirement in the certain modifications based on the (3) Support the homeowners to Regulatory Activity to ensure successful comments received.76 The purpose of promote sustainable homeownership for homeownership. The final rule does not this Regulatory Activity is to help very low-, low-, or moderate-income include a counseling requirement income-eligible families build wealth families, including reviewing and pre- because almost all shared equity through sustainable homeownership. approving refinances or home equity programs already include effective Shared equity programs are divided lines of credit. homeownership counseling, and it into: (i) Resale restriction programs, Over 30 comment letters addressed could result in shared equity programs where the resale price is explicitly the proposed shared equity having to meet differing counseling limited, and (ii) shared appreciation homeownership provisions. requirements from each Enterprise and loan programs, where second mortgage Commenters included both Enterprises, from lenders. Instead, FHFA has added loans are due upon sale and typically— a local government, local and national in the final rule a specific requirement but not necessarily—structured with nonprofit organizations including some that the shared equity program zero percent interest. While the shared that are engaged in shared equity administrators review and pre-approve appreciation subsidy retention vehicle programs and some that specialize in refinances or home equity lines of is technically a second mortgage, it does multifamily rental housing, a state credit, which require a greater ongoing not have many of the features housing finance agency, an role to support homeowners. This commonly associated with mortgage academician, and others. Most of the requirement also gives the Enterprises a debt. Shared appreciation second commenters supported the proposed specific way to determine whether the mortgage loans that function as subsidy Regulatory Activity because they said program administrators are promoting retention vehicles and do not expose this model is the way to most efficiently successful homeownership. borrowers or the Enterprises to the risks help as many families as possible build Fannie Mae endorsed including associated with typical second mortgage wealth through sustainable Enterprise support of shared equity loans are eligible for Duty to Serve homeownership. homeownership programs in the final credit. A nonprofit affordable multifamily rule, and made several specific Properties that were purchased with rental housing developer and a trade suggestions to facilitate smoother shared appreciation loans sell at market organization representing nonprofit mortgage loan purchases which have value, but the homeowner repays the affordable multifamily rental housing been carefully considered in the loan amount and a portion of the providers opposed the proposed modifications made in the final rule. appreciation to the nonprofit Regulatory Activity. The commenters Consistent with Freddie Mac’s overall stated that the Duty to Serve should comment favoring Additional Activities 76 A detailed discussion of the various models focus on affordable housing over Regulatory Activities, Freddie Mac and operation of shared equity homeownership preservation for multifamily rental suggested that Enterprise support for programs and further rationale for establishing a housing rather than for homeownership shared equity programs be an Regulatory Activity for affordable homeownership based on their interpretation of the Additional Activity or extra credit preservation are in the SUPPLEMENTARY INFORMATION for the proposed rule, 80 FR at 79182, 79202–79204 statute as applying only to rental activity, rather than a Regulatory (Dec. 18, 2015). housing preservation and because they Activity, on the basis that the

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Enterprises should not be required to provide the shared appreciation loans, activities (see Section IV. Extra Credit- consider any activities. are included in this Regulatory Activity. Eligible Activities—§ 1282.36(c)(3)). A trade association of shared equity The provision in the proposed rule Accordingly, the final rule retains the providers suggested that the proposed that would have required the proposed rule’s approach. preemptive purchase option Enterprises to monitor homeownership units to ensure affordability is preserved (vi) Preservation of Affordable Housing requirement, discussed above, is Through the Rental Assistance sufficient to ensure the long-term over resales is not included in the final rule. FHFA has determined that this Demonstration Program— affordability of an ownership unit, § 1282.34(d)(6) without the need for the additional provision is not specific enough to proposed requirement that the unit be facilitate Enterprise monitoring to Consistent with the proposed rule, preserved for a longer period when state ensure preservation of affordability over § 1282.34(d)(6) of the final rule law permits a longer period than 30 resales. Instead, the proposed 30-year establishes a Regulatory Activity for years. Freddie Mac favored state or local affordability term requirement, the Enterprise activities supporting law determining the periods of proposed preemptive option to purchase financing for HUD’s Rental Assistance affordability on the basis that using state requirement, and a new requirement Demonstration (RAD). RAD seeks to law definitions of affordability might limiting proceeds at resale, all of which improve and preserve distressed, HUD- expand the shared equity market. are included in the final rule, should supported affordable housing by Eliminating the proposed requirement ensure that affordability is preserved at allowing public housing authorities to that the affordability period exceed 30 resales without the Enterprises having access outside sources of capital for years when permitted by state law to actively monitor the resales. FHFA renovation and preservation. would reduce complexity in the loan expects that the Enterprises will A number of nonprofit organizations origination process, and avoid the document, at the time they purchase and one Enterprise favored establishing potential problem of a preservation shared equity loans, that the loans are a Regulatory Activity for Enterprise period being longer than the loan term. part of a structure meeting the above activities supporting RAD, arguing that FHFA is persuaded by these comments. requirements. Enterprise support for RAD is consistent Accordingly, the final rule omits the (v) Preservation of Affordable Housing with other activities in the affordable requirement in the proposed rule that a Through the Choice Neighborhoods housing preservation market. A trade organization stated that the unit be preserved for a longer period Initiative—§ 1282.34(d)(5) RAD program was too small to warrant when state law permits a longer period Consistent with the proposed rule, than 30 years. inclusion as a Regulatory Activity, and § 1282.34(d)(5) of the final rule that the Enterprises should instead be The trade association also suggested establishes a Regulatory Activity for encouraged to creatively and clarifying how nonprofit and for-profit Enterprise activities supporting innovatively support the underserved organizations, which administer the financing for HUD’s Choice markets. shared appreciation programs, could Neighborhoods Initiative (CNI). Created FHFA has determined that financing collaborate under the Regulatory after the enactment of HERA, CNI seeks debt associated with RAD is an Activity. The commenter noted that the to preserve and transform distressed, important way that the Enterprises can shared equity market is small, and most HUD-supported affordable housing. CNI support affordable housing preservation. nonprofit organizations and state and focuses on creating mixed-income RAD has already supported conversions local governments do not originate housing and investing in neighborhood of more than 30,000 units and resulted mortgage loans. FHFA finds that improvements and upgrades. in over $2 billion in needed partnerships between nonprofit The proposed rule specifically rehabilitation. 77 The program also organizations or state or local requested comment on whether appears likely to support preservation of governments and for-profit lenders Enterprise activities supporting CNI additional units into future. could help achieve the scale that would should be considered a ‘‘residential Accordingly, consistent with the make the shared appreciation market economic diversity’’ activity, rather than proposed rule, the final rule establishes more viable. Because shared a Regulatory Activity under the a Regulatory Activity for Enterprise appreciation loans must be affordable housing preservation market. activities supporting RAD. Additionally, underwritten, the Enterprises could Several nonprofit organizations FHFA clarifies that both RAD develop shared appreciation loan favored making Enterprise activities Component 1 (applicable to public products that they would be willing to supporting CNI a Regulatory Activity housing) and Component 2 conversions purchase from private mortgage lenders under the affordable housing (applicable to Rent Supplement, Rental partnering with the nonprofit preservation market, rather than under Assistance Payments, and Mod Rehab organizations or state or local residential economic diversity. Another contracts) are eligible under this governments, who would monitor commenter recommended making CNI Regulatory Activity. resales and support homeowners. activities both a Regulatory Activity Freddie Mac also requested clarification under the affordable housing (vii) Purchase or Rehabilitation of that the shared appreciation programs preservation market and a residential Certain Distressed Properties— could be administered by for-profit economic diversity activity, given the § 1282.34(d)(7) entities so long as a nonprofit entity large need for Enterprise support of Section 1282.34(d)(7) of the final rule participates in the program. neighborhood revitalization efforts. establishes a Regulatory Activity for FHFA is persuaded by these FHFA has determined that Enterprise activities that facilitate comments. Accordingly, in a change establishing a Regulatory Activity for financing the purchase or rehabilitation from the proposed rule, the final rule Enterprise activities supporting CNI will by very low-, low-, or moderate-income provides that shared appreciation sufficiently encourage the Enterprises to families or by nonprofit organizations or programs administered by nonprofit consider such activities. Separately, local or tribal governments serving such organizations or state or local FHFA has decided not to add a governments that enter into neighborhood revitalization component 77 http://portal.hud.gov/hudportal/documents/ partnerships with for-profit lenders who under residential economic diversity huddoc?id=RAD_Newsltr_Summer2016.pdf.

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income-qualifying families, of homes such as under FHFA’s Neighborhood distressed communities often lack. An eligible for a short sale, homes eligible Stabilization Initiative (NSI).78 Enterprise loan product for purchase or for a foreclosure sale, or a property that FHFA agrees that problems related to rehabilitation of distressed properties a lender acquires as the result of foreclosed and abandoned properties could enable income-qualifying foreclosure (sometimes referred to as can create blight and other negative homeowners, as well as nonprofit ‘‘Real Estate Owned’’ or ‘‘REO’’). This economic, social, and health outcomes organizations or local or tribal Regulatory Activity was not included in for neighborhoods. Distressed properties governments acting on behalf of the proposed rule. threaten the values of surrounding homeowners and renters, to obtain properties and ultimately the stability of rehabilitation financing without In response to a question FHFA asked neighborhoods. Many of these involving for-profit investors, thereby in the proposed rule on how to interpret properties require extensive repairs, but ensuring that more of the benefits of ‘‘preservation,’’ some nonprofit homeowners in the Duty to Serve financing flow to homeowners. organizations and policy advocacy income-qualifying range often face FHFA finds the commenters’ organizations commented together that difficulties obtaining financing to make arguments and the need for financing FHFA include in its interpretation of those repairs. Potential homebuyers in for distressed properties compelling. preservation activities that literally this income-qualifying range also often Accordingly, the final rule establishes a preserve the physical integrity, face difficulties obtaining financing to Regulatory Activity for Enterprise habitability, and functionality of purchase distressed properties. support of financing for certain properties located in neighborhoods Establishing a Regulatory Activity in the distressed properties. with naturally occurring affordable final rule for Enterprise support for such FHFA considered limiting this housing. FHFA finds that financing to financing could help address the credit Regulatory Activity to homes located address blighted properties is critical to gap for these homeowners, potential only in blighted neighborhoods, where preserve the affordability of those homebuyers, and nonprofit most vacant and abandoned homes are properties as well as naturally occurring organizations. found. However, FHFA determined that affordability in their surrounding While both Enterprises already offer very low-, low-, and moderate-income neighborhoods. Accordingly, FHFA’s purchase money mortgage products families also should have the interpretation of ‘‘preservation’’ targeting lower-income families, in the opportunity to purchase vacant and includes the Regulatory Activity neighborhood stabilization context there abandoned homes in other areas. established in § 1282.34(d)(7). FHFA is a need not only for purchase money Accordingly, the final rule sets no will provide additional guidance on mortgages, but also for loan products geographic limits on this Regulatory such purchase and rehabilitation in the that support repairs, rehabilitation, and Activity. Evaluation Guidance. demolition work. Several commenters There are key differences between this Regulatory Activity and the NSI, which The proposed rule discussed the also cited a need for loan products that is not part of the Duty to Serve. First, important role the Enterprises can play address the breakdowns in markets that this Regulatory Activity targets all in stabilizing neighborhoods but did not occur when appropriate comparison homes eligible for a short sale, eligible include purchasing and rehabilitating data is not available to support home for a foreclosure sale, or REO, rather distressed properties as a specific appraisals. The Duty to Serve presents an opportunity to complement existing than just homes owned by the Regulatory Activity. Local neighborhood Enterprises. Second, this Regulatory stabilization programs were discussed neighborhood stabilization programs and efforts, such as the NSI, with Activity supports the financing of in the proposed rule, and are discussed repairs, rehabilitations, and under § 1282.34(c)(9) above, as financing tools that could jump-start neighborhood stabilization efforts. Some demolitions, in addition to simply examples of ‘‘comparable state and local purchase money mortgages. Third, this affordable housing programs’’ that an economists suggest that homeowners are more likely than other buyers to invest Regulatory Activity targets the purchase Enterprise could include in its Plan to or rehabilitation of vacant and in default address foreclosure and abandonment in their homes, neighborhoods and local economies.79 or abandoned homes, rather than the prevention programs benefiting Duty to sale or disposition of those homes. Serve income-eligible households. A Investors often profit from the lack of credit availability for repair and The Duty to Serve is limited under the number of commenters, primarily statute to support for financing products organizations that advocate for rehabilitation of vacant and abandoned homes because investors have credit that promote affordable housing or stabilizing disinvested neighborhoods, neighborhood stabilization.80 Therefore, recommended providing Duty to Serve access that individual homeowners and nonprofit organizations operating in Duty to Serve credit is not available for credit for Enterprise activities that Enterprise activities under the NSI or for support local neighborhood stabilization any neighborhood stabilization efforts programs to combat the deterioration of 78 See NSI Fact Sheet 11/10/2015, available at http://www.fhfa.gov/PolicyProgramsResearch/ other than stabilization efforts directly foreclosed and abandoned homes and Programs/Pages/Neighborhood-Stabilization- related to creating Enterprise loan the destabilizing effect those properties Initiative.aspx. The NSI was launched as a pilot to purchase products. have on low-income neighborhoods. facilitate the disposition of REO properties in ways Enterprise loan purchase products The commenters urged FHFA to be that will stabilize neighborhoods. Id. The NSI leverages the National Community Stabilization that could receive Duty to Serve credit more aggressive in overseeing the Trust, a national nonprofit organization that works under this Regulatory Activity include Enterprises’ management of their closely with local governments and other those that support purchases, repairs, foreclosed properties and urged FHFA community resources to make informed decisions rehabilitations, or demolition work on to ensure that the Enterprises have on treatment of individual properties. Id. 79 See generally Atif Mian and Amir Sufi, ‘‘House homes eligible for short sale, homes effective policies and practices to of Debt: How They (and You) Caused the Great eligible for foreclosure sale, or REO, preserve foreclosed properties in the Recession, and How We Can Prevent It from including rental homes. Loan products best possible condition. Some of the Happening Again’’ (consumers underwater on their that reach Duty to Serve income-eligible commenters recommended giving the mortgages—even those who are current on payments—consume less, thereby weakening local families through nonprofit organizations Enterprises Duty to Serve credit for economies), available at http://press.uchicago.edu/ responsible disposition of REO stock, ucp/books/book/chicago/H/bo20832545.html. 80 See 12 U.S.C. 4565(a)(1).

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or local or tribal governments are also properties in rural areas—are new. The requirements associated with those included in the Regulatory Activity. Regulatory Activities and definition of thresholds.84 The CFPB definition This Regulatory Activity extends to ‘‘rural area’’ are discussed below. defines ‘‘rural’’ as counties that are purchase loans and rehabilitation loans outside of MSAs and outside of Definition of ‘‘Rural Area’’—§ 1282.1 regardless of who owns the loan or the micropolitan statistical areas adjacent to home, or the neighborhood in which the Section 1282.1 of the final rule MSAs, as well as census blocks home is located, as long as the loan defines ‘‘rural area’’ as: (1) A census designated as ‘‘rural’’ by the U.S. Census product includes Enterprise control of tract outside of a metropolitan statistical Bureau.85 The U.S. Census Bureau the resulting first mortgage loan. area (MSA) as designated by the Office designates rural areas as those outside of of Management and Budget (OMB); or Urban Areas and Urban Clusters based (e) Additional Activities (2) a census tract in an MSA but outside on the decennial Census.86 FHFA Section 1282.37(c)(2) of the final rule of the MSA’s Urbanized Areas as developed its proposed definition by also sets out requirements for eligible designated by the U.S. Department of considering its criteria for a definition of Additional Activities in the affordable Agriculture’s (USDA) Rural-Urban ‘‘rural area,’’ the USDA, CFPB, and U.S. housing preservation market, specifying Commuting Area (RUCA) Code #1,81 Census Bureau definitions of ‘‘rural,’’ that these activities must preserve and outside of tracts with a housing and comments on the 2010 Duty to affordability of existing affordable density of more than 64 housing units Serve proposed rule. housing. Preservation can include per square mile in USDA’s RUCA Code Both Enterprises supported the Additional Activities that involve #2.82 This is a change from the proposed proposed definition of ‘‘rural area’’ but preserving existing subsidy where the rule, which also relied on USDA RUCA did not expound on their rationale. A term of affordability required for the codes. The proposed rule’s definition trade association similarly supported subsidy is followed, or where there is a included the first prong in the final FHFA’s proposed definition but did not deed restriction for the life of the loan. rule’s definition of ‘‘rural area’’—a elaborate on why it preferred the It may also involve preserving the census tract outside of an MSA as definition. affordability of properties in designated by OMB. However, the A nonprofit organization, a state conjunction with state or local proposed rule’s definition excluded all housing finance agency, and several inclusionary zoning, real estate tax Urbanized Areas and Urban Clusters— policy advocacy organizations preferred abatement, or loan programs, where a RUCA Codes 1, 4, and 7—within an the USDA definition of ‘‘rural,’’ stating regulatory agreement, recorded use MSA from being considered rural. that it is well understood and its restriction, or deed restriction maintains There is no single, universally limitations are already accepted by the affordability of a portion of the accepted definition of ‘‘rural area’’ market. However, FHFA has determined property’s units for the term defined by because varying definitions achieve that the commenters did not provide the state or local program. different policy objectives.83 FHFA any compelling evidence addressing developed its definition of ‘‘rural area’’ how the USDA definition meets FHFA’s 3. Rural Markets—§ 1282.35 for the Duty to Serve based on three primary criteria discussed above for a The below section describes the final primary criteria: (1) The definition definition of ‘‘rural area.’’ rule provisions for the rural market and should be broad enough to include rural Several commenters, including explains FHFA’s rationale for adopting residents living in outlying counties of nonprofit organizations, policy four Regulatory Activities for this metropolitan areas; (2) the definition advocacy organizations, and a state market. The four Regulatory Activities should remain stable over time to housing finance agency, recommended are: (1) High-needs rural regions; (2) support the Enterprises’ Plans; and (3) modification of the proposed definition high-needs rural populations; (3) the definition should remain easy to of ‘‘rural area.’’ The commenters stated financing by small financial institutions implement and operationalize by the that the proposed definition is overly of rural housing; and (4) small Enterprises. As discussed in the inclusive within metropolitan areas by multifamily rental properties in rural SUPPLEMENTARY INFORMATION to the including suburban/exurban areas. The below section also explains proposed rule, FHFA considered the communities that are not truly rural in FHFA’s definitions of ‘‘rural area,’’ U.S. Census Bureau, CFPB, and USDA character, and overly restrictive within ‘‘high-needs rural areas,’’ and ‘‘high- definitions of ‘‘rural’’ but determined metropolitan areas by excluding certain needs rural populations,’’ which have that the definition it proposed would small towns, particularly in the Western been expanded from those in the better serve the Duty to Serve policy U.S., that are truly rural in character. proposed rule. objectives under these three criteria. FHFA has decided to modify the a. Regulatory Activities The USDA definition of ‘‘rural’’ is proposed definition of ‘‘rural area’’ in based on the Housing Act of 1949 and the final rule in accordance with these Section 1282.35(c)(1)–(4) of the final defines ‘‘rural’’ areas generally as those comments to more accurately target rule identifies four specific types of that are not part of or associated with an areas that are truly rural in character activities as Regulatory Activities under urban area and that meet certain and exclude those that are more the rural markets. Two of these population thresholds, along with realistically classified as suburban/ Regulatory Activities—Enterprise exurban communities, which do not activities supporting high-needs rural 81 RUCA Code #1 is a tract that is in an urbanized share the challenges to accessing credit regions and Enterprise activities area within a metropolitan area (a town with over that rural markets face. FHFA has supporting high-needs rural 50,000 people). determined that the revised definition populations—were included in the 82 RUCA Code #2 describes a tract where 30 percent or more of the population commutes to a proposed rule under one Regulatory town with 50,000 people or more. 84 42 U.S.C. 1490. Activity. The other two Regulatory 83 See generally David A. Fahrenthold, ‘‘What 85 See 80 FR 59944, 59968 (Oct. 2, 2015), to be Activities—Enterprise activities related does rural mean? Uncle Sam has more than a dozen codified at 12 CFR 1026.35(b)(2)(iv)(A), effective to the financing of housing by rural answers,’’ Washington Post (June 8, 2013), available January 1, 2016. at http://www.washingtonpost.com/politics/what- 86 See United States Census Bureau, ‘‘Urban and small financial institutions and does-rural-mean-uncle-sam-has-more-than-a- Rural Classification,’’ Web. 20 (Feb. 2015), available Enterprise activities related to the dozen-answers/2013/06/08/377469e8-ca26-11e2- at https://www.census.gov/geo/reference/ua/urban- financing of small multifamily rental 9c79-a0917ed76189_story.html. rural-2010.html.

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will best serve the policy objectives of final rule’s definition of ‘‘rural area.’’ unique challenges in these high-needs the Duty to Serve. The Enterprises are encouraged to rural regions and populations. The modified definition in the final incorporate the data file into mapping Significant data gaps exist in rural rule maintains the first part of the and other tools that can further facilitate areas in part because under the Home definition of ‘‘rural area’’ from the use of the final rule’s definition. Mortgage Disclosure Act, financial proposed rule—a census tract outside of institutions with $44 million or less in (i) Housing in High-Needs Rural an MSA as designated by OMB. The assets or that do not have a branch in Regions—§ 1282.35(c)(1) final rule’s definition allows a metropolitan area are not required to micropolitan areas and small towns to Section 1282.35(c)(1) of the final rule collect and publicly disclose data on be considered rural. These tracts, establishes a Regulatory Activity for loans for home purchases and home described by RUCA Codes #4 87 and Enterprise support for financing of improvements, or data on #7,88 were excluded in the proposed housing located in high-needs rural refinancings.92 FHFA has determined rule’s definition. In addition, the final regions. Section 1282.1 of the final rule that more granular data on rural areas rule eliminates tracts described by defines a ‘‘high-needs rural region’’ as could help the Enterprises, researchers, RUCA Code #2 89 that have a housing any of the following regions located in housing providers, and mortgage density threshold of more than 64 units a rural area: (i) Middle Appalachia; (ii) lenders better understand the per square mile from being considered the Lower Mississippi Delta; (iii) a characteristics and housing and credit rural. Such tracts would have been colonia; or (iv) a tract located in a needs of these areas, including high- classified as rural areas under the persistent poverty county and not needs rural regions and high-needs rural proposed rule’s definition. FHFA added included in Middle Appalachia, the populations, and how best to serve the threshold of more than 64 units per Lower Mississippi Delta, or a colonia. them. To address these data gaps, FHFA square mile in order to differentiate This definition is similar to the encourages the Enterprises to collect suburban/exurban tracts from rural definition in the proposed rule, with the and share granular data with tracts within RUCA Code #2. addition of rural tracts located in researchers, lenders, and housing FHFA modeled the final rule’s persistent poverty counties as provided providers. definition of ‘‘rural area’’ on the in (iv) above. The final rule also makes The final rule makes several changes definition proposed by a national a change to the definition of ‘‘colonia.’’ or clarifications to the definitions of the nonprofit organization, the Housing Changes from the proposed rule are specific high-needs rural regions from Assistance Council, which was echoed discussed below. those in the proposed rule, as discussed by several other commenters. The FHFA chose the proposed rural below. threshold measure of housing density of regions for a Regulatory Activity a. Middle Appalachia. Consistent 64 units per square mile, also because they are characterized by a high with the proposed rule, the final rule recommended by the Housing concentration of poverty and includes Middle Appalachia as a high- Assistance Council and other substandard housing conditions. The needs rural region. There was commenters, was chosen because it is proposed rule specifically requested widespread support from commenters, an accepted methodology.90 For comment on whether Enterprise support including several nonprofit for housing for high-needs rural regions example, the USDA Forest Service organizations and policy advocacy and high-needs rural populations classifies private forest lands as organizations, for including Middle should be a Regulatory Activity. A exurban/urban if they have more than Appalachia in the specific high-needs number of policy advocacy rural regions identified by FHFA in the 64 housing units per square mile.91 organizations, nonprofit organizations, proposed rule, due to the neglect and These modifications, while adding government entities, and a trade persistent poverty the region faces. minor complexity to the definition, association supported including the Neither Enterprise took a position on meet FHFA’s criteria and objectives for proposed high-needs rural regions and including Middle Appalachia as a high- the definition of ‘‘rural area.’’ The rural populations as a Regulatory needs rural region. The proposed rule modifications result in a definition that Activity, stating that there are extensive discussed generally the Appalachian targets areas that are truly rural in challenges to serving these regions and Regional Commission’s (ARC) definition character while excluding areas that are populations, and that these regions and of ‘‘Middle Appalachia’’ as a sub-region suburban/exurban and already well populations have historically lacked of Appalachia consisting of 230 ARC- served by the Enterprises. In order to necessary investment. Additionally, in designated counties in Kentucky, North make the definition easy to implement FHFA’s discussions with both Carolina, Ohio, Tennessee, Virginia, and and operationalize, FHFA will provide Enterprises, the Enterprises highlighted West Virginia. The ARC definition of to the Enterprises, and post on FHFA’s certain regions and populations, such as ‘‘Middle Appalachia’’ was not Web site, a data file that lists all of the colonias and members of a Federally specifically included in the proposed census tracts that are eligible under the recognized Indian tribe in an Indian § 1282.1. Commenters did not area, as unique areas and populations recommend changes to the ARC 87 RUCA Code #4 describes a tract that is in a micropolitan area with a primary commuting flow that will likely take significant time and definition for purposes of this within a large urban cluster of 10,000 to 49,999 resources in order to make a meaningful Regulatory Activity, but Fannie Mae people. difference to improve housing requested that FHFA incorporate a 88 RUCA Code #7 describes a tract that is in a conditions. specific definition of ‘‘Middle small town with a primary commuting flow within To create an incentive for the a small urban cluster of 2,500 to 9,999 people. Appalachia’’ in the final rule text. 89 RUCA Code #2 describes a tract where 30 Enterprises to serve both high-needs FHFA has determined that percent or more of the population commutes to a rural regions and high-needs rural incorporating a specific definition of town with 50,000 people or more. populations, the final rule splits this 90 David M. Theobold, ‘‘Land-Use Dynamics category into two separate Regulatory 92 See Federal Financial Institutions Examination beyond the American Urban Fringe,’’ Geographical Activities. FHFA concludes that this Council, ‘‘A Guide to HMDA Reporting: Getting It Review, Vol. 91, No.3 (July 2001), pp. 544–564. Right!’’ (2013); Consumer Financial Protection 91 ‘‘Forests on the Edge—Housing Development of change could lead the Enterprises to Bureau, ‘‘2016 Informational Guide Letter’’ (2015), America’s Private Forests,’’ U.S. Department of devise more narrowly tailored and available at https://www.ffiec.gov/hmda/pdf/ Agriculture, Forest Service (May 2005). responsive strategies to target the 2016letter.pdf.

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‘‘Middle Appalachia’’ in the final rule definition. Accordingly, § 1282.1 of the any federally established definition text can assist the Enterprises in final rule defines ‘‘Lower Mississippi used by state and local programs. proposing their activities under the Delta’’ as the counties identified by FHFA finds that definitions used by Duty to Serve. Accordingly, § 1282.1 of these laws, along with any future HUD and USDA would pose challenges the final rule defines ‘‘Middle updates Congress may make to the under the Duty to Serve because they Appalachia’’ as the ‘‘central’’ sub-region definition of the region. In order to include a requirement that to be of Appalachia under the Appalachian make the definition easy to implement considered a ‘‘colonia,’’ the community Regional Commission’s subregional and operationalize, FHFA will provide must lack a potable water supply and classification of Appalachia. In order to to the Enterprises, and post on FHFA’s adequate sewage systems.93 As noted in make the definition easy to implement Web site, a data file that lists all of the the SUPPLEMENTARY INFORMATION to the and operationalize, FHFA will provide census tracts that are eligible under the proposed rule, if such requirements to the Enterprises, and post on FHFA’s final rule’s definition of ‘‘Lower were applied for Duty to Serve Web site, a data file that lists all of the Mississippi Delta.’’ purposes, the Enterprises would likely census tracts that are eligible under the c. Colonias. Consistent with the be able to receive little or no Duty to final rule’s definition of ‘‘Middle proposed rule, the final rule includes Serve credit for activities in colonias Appalachia.’’ colonias as high-needs rural regions but because the Enterprises’ property b. The Lower Mississippi Delta. revises the definition of ‘‘colonia’’ from eligibility requirements would not Consistent with the proposed rule, the that in the proposed rule, as discussed permit them to purchase mortgages on final rule includes the Lower below. A number of commenters properties that lack potable water Mississippi Delta as a high-needs rural supported including colonias as high- supplies and adequate sewage systems. region. There was widespread support needs rural regions because of their In addition, FHFA has determined from commenters for including the economic distress and persistent that the geographic limitation in HUD Lower Mississippi Delta as a high-needs poverty. Neither Enterprise took a and USDA definitions of ‘‘colonia’’ that rural region because of its unique position on including colonias as high- was included in FHFA’s proposed challenges and housing conditions, as needs rural regions. definition could discourage the with the other high-needs rural regions Section 1282.1 of the final rule Enterprises from serving communities identified in the proposed rule. Neither defines a ‘‘colonia’’ as an identifiable designated as colonias by state, tribal or Enterprise took a position on including community that meets the definition of local programs that have similar indicia the Lower Mississippi Delta as a high- a colonia under a federal, state, tribal, or of poverty and needs, but do not meet needs rural region. local program. This is a change from the the geographic requirement. Both the The proposed rule discussed proposed rule, which would have HUD and USDA definitions require that generally the Lower Mississippi Delta defined a ‘‘colonia’’ as any identifiable to be considered a colonia, the Development Act’s and former Lower community that (i) is designated as a community must be located in an area Mississippi Delta Development colonia by the state or county in which within 150 miles of the U.S.-Mexico Commission’s definition of ‘‘Lower it is located; (ii) is located in Arizona, border. FHFA’s proposed definition of Mississippi Delta’’ as the counties and California, New Mexico, or Texas; and ‘‘colonia’’ would have included a parishes in portions of Arkansas, (iii) is located in a U.S. census tract with requirement that the community be Louisiana, Mississippi, Missouri, some portion of the tract being within located in a U.S. census tract with some Illinois, Tennessee, Kentucky, and 150 miles of the U.S.-Mexico border. portion of the tract within 150 miles of Alabama. This definition of ‘‘Lower FHFA chose this proposed definition in the U.S.-Mexico border. FHFA notes Mississippi Delta’’ was not specifically order to incorporate certain elements of that, for example, several counties in included in proposed § 1282.1. the definition used by the Cranston- Texas with communities designated as Commenters did not recommend Gonzales National Affordable Housing colonias by the state are not within 150 changes to this definition for purposes Act, discussed below, while also miles of the U.S.-Mexico border, as the of this Regulatory Activity or request providing a broad scope for Enterprise State of Texas includes a category of clarification of the scope of the activities, including the purchase of ‘‘non-border colonias’’ in its water code. definition. Fannie Mae requested that mortgage loans, in colonias. These colonias do not meet the 150-mile FHFA add a specific definition of The proposed rule specifically requirement, yet share similar indicia of ‘‘Lower Mississippi Delta’’ in the final requested comment on how FHFA rule text. should define a ‘‘colonia’’ for Duty to 93 The Cranston-Gonzalez National Affordable As with the ‘‘Middle Appalachia’’ Serve purposes. Few commenters made Housing Act defines a ‘‘colonia’’ as an identifiable high-needs rural region, FHFA has recommendations on the proposed community that (A) is in the State of Arizona, determined that incorporating a specific definition, and no commenters California, New Mexico, or Texas; (B) is in the area definition of ‘‘Lower Mississippi Delta’’ specifically supported it. Fannie Mae of the United States within 150 miles of the U.S.- Mexico border (not including any standard MSA in the final rule text can assist the recommended that FHFA modify the with a population exceeding 1 million), or is in the Enterprises in proposing their activities proposed definition to include the United States-Mexico border region (the applicable under the Duty to Serve. The Rural entire county in which a colonia is criterion depends on the particular housing Development, Agriculture, and Related located, due to the impact that a colonia program); (C) is determined to be a colonia on the basis of objective criteria, including lack of potable Agencies Appropriations Act for FY may have on the economy and housing water supply, lack of adequate sewage systems, and 1989, Public Law 100–460, included the needs of the county as a whole. A state lack of decent, safe and sanitary housing; and (D) Lower Mississippi Delta Act, which housing finance agency expressed was in existence as a colonia before November 28, authorized the Lower Mississippi Delta concern about the potential for 1990. See 42 U.S.C. 1479(f)(8); 42 U.S.C. 5306 note. Previous statutory definitions included the criteria Development Commission and confusion and operational difficulties that a state or county in which a community is identified counties in the Lower that could arise from the many located designate a particular community as a Mississippi Delta. The Consolidated conflicting definitions of colonia. The ‘‘colonia.’’ See Public Law 101–625, 104 Stat. 4290, Appropriations Act of 2001, Public Law commenter recommended that FHFA 4396 (1990). HUD and USDA definitions of ‘‘colonia’’ rely on previous and current statutory 106–554, and the Farm Security and define ‘‘colonias’’ as the eligible definitions of ‘‘colonia,’’ based on the specific Rural Investment Act of 2002, Public communities under the commonly used housing program. See 7 CFR 1777.4; 24 CFR Law 107–171, added counties to the HUD and USDA programs, as well as 570.411.

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poverty and needs as other colonias in ‘‘high-needs rural regions.’’ This is a organizations used the USDA Economic Texas that meet the 150-mile change from the proposed rule, which Research Service’s definition in requirement. The Texas Secretary of would not have included rural tracts describing what a ‘‘persistent poverty State identifies Marion, Newton, Red located in persistent poverty counties in county’’ means, but did not explicitly River, and Sabine Counties, which are the definition. recommend that FHFA use that located more than 150 miles from the The proposed rule specifically definition. Several other policy Texas-Mexico border, as counties that requested comment on whether there advocacy organizations recommended include colonias. are high-needs rural regions or high- that FHFA add persistent poverty FHFA notes that in many cases, state needs rural populations in addition to counties located in the rural Southeast’s and local governments play an those identified that should be included ‘‘Black Belt’’ as a fourth high-needs important role in the level of public and, if so, how they should be defined rural region, but they did not propose a controls related to factors such as the in order to receive Duty to Serve credit. specific definition of ‘‘persistent poverty initial designation of colonias, their A number of commenters, including county.’’ ongoing conditions, and local initiatives several nonprofit organizations and FHFA finds compelling the comments to improve their conditions. Some policy advocacy organizations, pointed that tracts in rural areas that are located colonias are incorporated communities out that certain regions similar in nature in persistent poverty counties should be under the control of a city, some are to the high-needs rural regions in the included as high-needs rural regions in unincorporated and under the control of proposed rule were omitted from the the final rule because, as the a county, and some may be under the proposed rule’s definition of ‘‘high- commenters noted, this would capture control of both a city and a county if needs rural region.’’ The regions many of the regions which commenters they are located in extra-jurisdictional identified by the commenters include: identified as high-needs that were territories of a city that shares some Rural areas of Puerto Rico; much of omitted from the proposed rule’s level of control with the county. The mainland Alaska; the central valley of definition of ‘‘high-needs rural region.’’ motivation to improve conditions for California; and the region described by In choosing a measure for persistent residents of colonias has led to a variety commenters as the ‘‘Southern Black poverty areas, FHFA analyzed both the of projects that combine funding from Belt’’ in Alabama, Georgia, and the CDFI Fund definition and the USDA multiple federal and non-federal Carolinas. Of these regions, the one Economic Research Service definition. sources. most frequently cited by commenters as The CDFI fund identified 384 counties After considering the comments and a high-needs rural region was the with persistent poverty under its the varying definitions of ‘‘colonia,’’ ‘‘Southern Black Belt.’’ definition, using data from the 1990 FHFA has determined that broadening The most common recommendation census, the 2000 census, and the 2006– the proposed definition of ‘‘colonia’’ from commenters who supported 2010 American Community Survey.94 could encourage Enterprise support for changes to the definition of ‘‘high-needs Under its methodology, the USDA colonias, as defined by federal, state, rural region’’ was to include areas Economic Research Service identified tribal, or local programs. Accordingly, struggling with ‘‘persistent poverty’’ as 353 counties with persistent poverty. § 1282.1 of the final rule defines a high-needs rural regions, which would FHFA has selected the CDFI Fund’s ‘‘colonia’’ as an identifiable community capture rural regions struggling with the definition for the final rule because it that meets the definition of a colonia same types of challenges as the specific includes both 31 more counties and 286 under a federal, state, tribal, or local high-needs rural regions identified in additional rural area tracts than the program. Since FHFA is adopting a the proposed rule. Commenters USDA Economic Research Service broad definition of ‘‘colonia,’’ it will be supporting this approach included definition along with having a greater unable to provide the Enterprises a data several nonprofit organizations and level of support from commenters. file that lists all of the census tracts that policy advocacy organizations. The persistent poverty counties are eligible under the final rule’s Some commenters either referenced identified by the CDFI Fund capture definition of ‘‘colonia,’’ as it plans to do or recommended a particular definition regions, such as the ‘‘Southern Black for the other high-needs rural regions. for ‘‘persistent poverty’’ areas. A Belt’’ and parts of Alaska, that were To address the data challenges that exist nonprofit organization recommended omitted from the proposed rule’s in specifically identifying the census that FHFA use the definition of definition of a ‘‘high-needs rural tracts that contain ‘‘colonias,’’ FHFA ‘‘persistent poverty county’’ used by the region.’’ The CDFI Fund definition of encourages the Enterprises to collect U.S. Department of Treasury’s CDFI ‘‘persistent poverty counties’’ does and share granular data with Fund, which defines a ‘‘persistent overlap to a large extent with the other researchers, lenders, and housing poverty county’’ as a county that had high-needs rural regions and providers. poverty rates of 20 percent or more over populations identified in the final rule, Enterprise purchases of loans that are the past 30 years, as measured by the such as Middle Appalachia, the Lower made under any HUD or USDA 1990, 2000, and 2010 decennial Mississippi Delta, colonias, and Indian programs that serve a ‘‘colonia,’’ are censuses. A policy advocacy areas. Accordingly, to prevent double- eligible for Duty to Serve credit under organization recommended the same counting for Duty to Serve purposes, this Regulatory Activity, provided they definition without naming the CDFI tracts in ‘‘persistent poverty counties’’ are located in a ‘‘rural area’’ as defined Fund. Another policy advocacy considered ‘‘high-needs rural regions’’ in the final rule and are for very low- organization recommended the will be limited to those places that are , low, or moderate-income households definition of ‘‘persistent poverty not already included in Middle as defined under the Duty to Serve. county’’ used by the USDA Economic Appalachia, the Lower Mississippi d. Tracts in Persistent Poverty Research Service, which defines a Delta, or colonias. Counties. Section 1282.1 of the final ‘‘persistent poverty county’’ as one with The CDFI Fund definition of rule includes rural tracts that are located poverty rates of 20 percent or more over ‘‘persistent poverty counties’’ does not in ‘‘persistent poverty counties,’’ and the past 30 years, as measured by the distinguish between rural poverty that are not located in Middle 1980, 1990, and 2000 decennial Appalachia, the Lower Mississippi censuses and the 2007–2011 American 94 Consolidated Appropriations Act, 2012, Public Delta, or colonias, in the definition of Community Survey. Some nonprofit Law 112–74, 125 Stat. 887 (2011).

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counties and urban poverty counties. nonprofit organizations and policy and migrant agricultural workers, and For example, the CDFI Fund definition advocacy organizations supported whether agricultural workers with includes Kings County, N.Y. and Bronx providing Duty to Serve credit for this permanent annual employment should County, N.Y., located in New York City, population because of its unique needs be included. which are not rural by any definition. and the historical lack of mortgage Several policy advocacy organizations Since the CDFI Fund definition is not lending that has been available to it. and nonprofit organizations supported limited to rural areas, the final rule Both Enterprises proposed an including seasonal or migrant workers provides that the tracts in persistent alternative approach that would target as a high-needs rural population due to poverty counties must be located in geographical areas as a way to assist this their significant housing needs, and ‘‘rural areas,’’ as defined in the final population. The Enterprises stated that some expressed optimism about how rule, in order to be considered ‘‘high- this change would achieve operational the Enterprises could do more to needs rural regions.’’ In the 384 counties efficiencies by providing Duty to Serve interact with these communities. identified by the CDFI Fund as credit for loan purchases in ‘‘Indian A nonprofit organization persistent poverty counties, FHFA has areas’’ without requiring that a borrower recommended that other categories of identified 2,127 tracts that are located in actually be a member of a Federally migrant workers, such as those such ‘‘rural areas.’’ recognized Indian tribe. FHFA employed in commercial agricultural In short, § 1282.1 of the final rule considered this recommendation, but production centers like saw mills, be defines ‘‘high-needs rural region’’ to finds that the Enterprises’ suggested included in this high-needs rural include a rural tract in a ‘‘persistent geographical areas would be over- population, but did not provide reasons poverty county’’ that is not located in inclusive and would direct support for expanding the definition. Middle Appalachia, the Lower away from the targeted population. The A state housing finance agency noted Mississippi Delta, or a colonia. Section Enterprises’ suggested changes would that housing finance agencies and other 1282.1 defines a ‘‘persistent poverty potentially drive lending to areas where state, local, and nonprofit organizations county’’ as a county that has had 20 it is far less challenging to finance currently serve migrant and seasonal percent or more of its population living housing and where the needs of this agricultural workers through a variety of in poverty over the past 30 years, as population are much less severe, such federal programs, and advocated for measured by the most recent successive as housing within the bounds of an Enterprise support for successful decennial censuses. For the first Duty to Indian area that is titled as fee simple existing programs and for the Serve Plan evaluation cycle, the property, or housing that is not owned development of new programs for Duty counties identified by the CDFI Fund as by a member of a Federally recognized to Serve credit. ‘‘persistent poverty counties’’ will be Indian tribe. Accordingly, the final rule Both Enterprises expressed concerns used. In order to make the definition does not adopt this recommendation. about limiting the Duty to Serve rule to easy to implement and operationalize, Loans made under the HUD Section seasonal and migrant agricultural FHFA will provide to the Enterprises, 184 and Title VI programs serve workers, and Freddie Mac specifically and post on FHFA’s Web site, a data file members of a Federally recognized recommended that annual farmworkers that lists all of the census tracts that are Indian tribe in Indian areas consistent be considered a high-needs rural eligible under the final rule’s definition with the final rule’s definition of this population. Fannie Mae opposed of ‘‘persistent poverty counties.’’ high-needs rural population. Enterprise applying the U.S. Department of Labor’s purchases of loans that are made definition of ‘‘migrant and seasonal (ii) Housing for High-Needs Rural through these programs and that are agricultural workers,’’ citing a potential Populations—§ 1282.35(c)(2) provided to a Federally recognized operational burden that the definition Section 1282.1 of the final rule Indian tribe or its members, located in could impose because: (1) Fannie Mae defines ‘‘high-needs rural population’’ an Indian area, are eligible for Duty to does not collect the data needed for the as any of the following populations Serve credit under this Regulatory definition, and (2) people may not located in a rural area: (i) Members of Activity, provided they are located in a accurately self-identify as beneficiaries. a Federally recognized Indian tribe ‘‘rural area’’ as defined in the final rule Both Enterprises proposed an located in an Indian area; or (ii) and are for very low-, low, or moderate- alternative approach that would target agricultural workers. This definition is income households as defined under the geographical areas as a way to assist the same as the definition in the Duty to Serve. agricultural workers. Fannie Mae proposed rule except that the final rule b. Agricultural Workers. Section provided a more detailed explanation of includes all agricultural workers instead 1282.1 of the final rule also includes this methodology, suggesting that FHFA of only migrant and seasonal agricultural workers within the consider using USDA data to identify agricultural workers. FHFA chose these definition of ‘‘high-needs rural areas that include a certain threshold specific rural populations for a population.’’ Section 1282.1 defines percentage of migrant agricultural Regulatory Activity because they ‘‘agricultural worker’’ to mean any workers. FHFA considered this experience a high concentration of person that meets the definition of an recommendation, but finds that the poverty and live in substandard housing agricultural worker under a federal, Enterprises’ suggested geographical conditions. A discussion of comments state, tribal, or local program. This is a areas would be over-inclusive and on whether Enterprise support for high- change from the proposed rule, which would direct support away from the needs rural populations should be a would have included only migrant and agricultural worker population. Regulatory Activity is included under seasonal agricultural workers, as FHFA has considered the comments the ‘‘high-needs rural regions’’ defined by the U.S. Department of and finds the arguments compelling that discussion above. Labor. the final rule should not be limited to a. Members of a Federally Recognized The proposed rule specifically migrant and seasonal agricultural Indian Tribe Located in an Indian Area. requested comment on whether FHFA workers, which would exclude people Section 1282.1 of the final rule defines should define ‘‘high-needs rural working on dairy farms, animal ‘‘Federally recognized Indian tribe’’ and population’’ to include other categories processing plants, or fisheries, as well as ‘‘Indian area’’ consistent with the of agricultural workers with high-needs those who work on a farm year-round definitions in the proposed rule. Several housing issues in addition to seasonal engaged in activities such as irrigation

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work. FHFA finds no evidence that that specializes in rural housing small financial institutions to help them annual agricultural workers have lesser identified bank consolidation as a become approved seller/servicers. housing needs than migrant and barrier to rural lending for housing, Consolidation of the financial services seasonal agricultural workers. In fact, citing Home Mortgage Disclosure Act industry has hit rural areas particularly some data shows that agricultural data showing that nearly 30 percent of hard. The number of banks workers as a whole are among the all reported rural and small town home headquartered in farm-dependent rural poorest populations, with families purchase loans were made by just ten areas declined from about 1,500 in 1995 living in poverty at twice the national banks. Additionally, the commenter to less than 600 in 2015.96 Overall, the rate. stated that large banks serving number of banks with less than $1 Accordingly, § 1282.1 of the final rule communities far from their headquarters billion in assets has decreased includes agricultural workers rather may not be as attached to the dramatically over the last 30 years. In than only migrant and seasonal workers communities in comparison to smaller 1985, there were 17,467 FDIC-insured as a ‘‘high-needs rural population.’’ community banks based in those institutions with less than $1 billion in Section 1282.1 defines ‘‘agricultural communities. The commenter asserted assets; by 2010, this number had worker’’ as any person that meets the that this has resulted in large banks not declined to 6,992.97 With mergers, definition of an agricultural worker fully knowing their customer base, consolidations, and acquisitions under a federal, state, tribal, or local being less involved in the community, dramatically reducing the number of program. FHFA has determined that this and potentially making fewer loans in community banks,98 opportunities for definition of ‘‘agricultural worker’’ the community. the Enterprises to support affordable could include farmworkers who have To help address this issue, the housing through small financial significant housing needs but may not commenter recommended encouraging institutions have diminished. migrate or work in seasonal patterns, the Enterprises to work with FHFA considered the definitions of and broadens the types of farmworker community-based lenders in rural areas small financial institutions/community programs across states, localities, and by giving Duty to Serve credit for banks from the CRA, CFPB, FRB, and tribal jurisdictions that the Enterprises Enterprise purchases of rural mortgage OCC, and found that there are no could support for Duty to Serve credit. loans generated by small bank lenders. operational impediments that would The USDA 514 and 516 programs The commenter recommended defining make any of those definitions provide loans or grants for properties ‘‘small bank lenders’’ using the impractical for the Enterprises. The with affordable housing for agricultural Community Reinvestment Act’s (CRA) Enterprises currently have a variety of workers. Because the final rule’s classification of small financial programs, such as the cash window definition of ‘‘agricultural worker’’ institutions under the CRA threshold for delivery process, that make it possible allows for use of the definition of ‘‘intermediate small institutions,’’ for even very small lenders to engage in ‘‘agricultural worker’’ by another federal which is currently $304 million in business with the Enterprises, as long as program, such as a USDA program, 95 assets. they meet the Enterprises’ minimum net Enterprise purchases of loans associated Identifying a different concern, a worth requirements. with USDA Section 514 and 516 state-based rural advocacy organization FHFA analyzed the rationales for the properties are eligible for Duty to Serve suggested that small financial CRA, CFPB, FRB, and OCC definitions, credit under this Regulatory Activity, institutions in rural areas may lack the and finds that the purpose of the CRA provided the properties are located in a experience necessary to address rural definition aligns most closely with ‘‘rural area’’ as defined in the final rule lending challenges. The commenter FHFA’s policy goal for including and support affordable housing for very stated that the Enterprises can help support for small financial institutions low-, low, or moderate income address these capacity shortcomings by in the final rule. Under the CRA, a small households as defined under the Duty to providing technical and product-related bank is defined as a financial institution Serve. support to small lenders. A state with assets of less than $1.216 billion. housing finance agency commented that (iii) Financing by Small Financial A small bank becomes an ‘‘intermediate current Enterprise requirements for Institutions of Rural Housing— small bank’’ when it has assets of at small financial institutions to become § 1282.35(c)(3) least $304 million and less than $1.216 seller/servicers can be onerous and billion.99 Small lenders play an The final rule establishes a new expensive. A nonprofit organization important role in providing affordable Regulatory Activity for Enterprise specializing in rural housing housing, but face certain operational activities related to the financing by development commented that small small financial institutions of owner- financial institutions, particularly 96 occupied or multifamily rental housing Julie Stackhouse, Federal Reserve Bank of St. CDFIs, have been focused on serving Louis, Presentation at the Federal Reserve Board in rural areas. This is a change from the rural areas for many years and are well Conference, ‘‘The Future of Rural Communities: proposed rule, which would not have positioned to work with the Enterprises Implication for Housing’’ (May 10, 2016). included this as a Regulatory Activity. to help address barriers to rural lending. 97 FDIC Community Banking Research Project, The proposed rule specifically ‘‘Community Banking by the Numbers—Federal FHFA finds the comments compelling Deposit Insurance Corporation,’’ p. 3 (February 16, requested comment on what types of that the rural market would benefit from 2012) (PowerPoint Presentation), available at barriers exist to rural lending for adding a Regulatory Activity in the final https://www.fdic.gov/news/conferences/ housing and how the Enterprises could communitybanking/community_banking_by_the_ rule that specifically encourages _ best address them. The proposed rule Enterprise activities related to lending numbers clean.pdf>. also asked what types of Enterprise 98 Federal Deposit Insurance Corporation, in rural areas by small financial ‘‘Community Banking Study’’ (December 2012), activities could help build institutional institutions. This is an area where the available athttps://www.fdic.gov/regulations/ capacity and expertise among market Enterprises have the capacity to make resources/cbi/report/cbi-full.pdf. participants serving rural areas. A an immediate difference by providing 99 Board of Governors of the Federal Reserve number of commenters identified System, ‘‘Agencies Release Annual CRA Asset-Size technical assistance and working with Threshold Adjustments for Small and Intermediate barriers to rural lending and discussed Small Institutions,’’ Press release, December 22, how the Enterprises could address these 95 See 80 FR 81162 (Dec. 29, 2015) (as adjusted 2015, available athttp://www.federalreserve.gov/ challenges. A nonprofit organization annually for inflation). newsevents/press/bcreg/20151222a.htm.

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challenges that put them at a commenter and a policy advocacy benefit from adding a Regulatory disadvantage in relation to larger organization stated that multifamily Activity in the final rule that financial institutions. Because the asset properties in rural areas tend to be specifically encourages Enterprise size of small financial institutions is a small. The commenter noted that there support for financing of small barrier to lending in the rural market are very few multifamily properties with multifamily rental properties in rural and there are limited opportunities for more than 30 units and that two of the areas, including Enterprise technical the Enterprises to more robustly engage largest rural multifamily financing assistance to rural lenders for such these institutions, especially those with programs, the USDA Section 514 and properties. Due to the significant need less than $304 million in assets, FHFA 515 programs, average just 30 units per for small multifamily rental housing in finds that the CRA definition of small project. Given the smaller scale of these rural areas, the Regulatory Activity is banks below the ‘‘intermediate small properties, developers may encounter not limited to support for rural lenders bank’’ threshold can serve as a challenges with transaction and of a specific size, as under the reasonable asset cap to define ‘‘small operational costs, which can be spread Regulatory Activity in § 1282.34(d)(1) financial institution.’’ across large properties in a more cost- for small multifamily rental properties Accordingly, § 1282.35(c)(3) of the effective way. A rural housing trade under the affordable housing final rule establishes a Regulatory association labelled the challenges of preservation market. An Enterprise Activity for Enterprise activities related refinancing Section 515 small purchase of a loan on small multifamily to financing by small financial multifamily properties a crisis, and rental housing in a rural area is eligible institutions of housing in rural areas. identified data showing that a for Duty to Serve credit under both the Section 1282.1 defines ‘‘small financial significant share of Section 515 affordable housing preservation market institution’’ consistent with CRA’s multifamily units will be paid off by and the rural market, provided the classification of small banks below the 2024 and will require refinancing to activity complies with both threshold for ‘‘intermediate small maintain their affordability.100 §§ 1282.34(d)(1) and 1282.35(c)(4). banks’’ (i.e., those financial institutions Financing of small multifamily Examples of channels that the with less than $304 million in assets). housing faces unique challenges Enterprises could use to help address Enterprise purchases of loans made by compared to financing of larger the need for financing of small small financial institutions and that multifamily developments. Many multifamily rental housing in rural areas support housing under the USDA properties in the unsubsidized small include: (1) Purchasing loans that Section 502, 504, 514, 515, 516, and 538 multifamily market suffer from deferred support properties financed through the programs would be eligible for Duty to maintenance, energy inefficiency, and USDA Section 514, 515, and 538 Serve credit under this Regulatory faulty plumbing, which make it difficult programs; (2) purchasing loans Activity, provided the housing is for the rents to cover operating costs.101 originated under the HUD Small located in a ‘‘rural area’’ as defined in Financial institutions and developers Building Risk Sharing Initiative; (3) the final rule, and serves very low-, low, may be reluctant to finance rural purchasing loans originated under the or moderate-income families as defined housing if they believe their revenues USDA 538 program; and (4) providing under the Duty to Serve. The will not cover costs. Data from the technical assistance to lenders serving Enterprises may consider working with Residential Finance Survey indicate that rural areas, as long as the housing being aggregators that facilitate such lending in 2001, 12 percent of low-cost rental supported through the Enterprises’ from small financial institutions in rural properties with average monthly rents of activities is located in a ‘‘rural area’’ as areas for Duty to Serve credit. $400 or less reported negative net defined in the final rule, and serves very (iv) Small Multifamily Rental Properties operating income, an unsustainable low-, low-, or moderate-income in Rural Areas—§ 1282.35(c)(4) condition that could lead to accelerating households as defined under the Duty to losses of these units in the future.102 Serve. Section 1282.35(c)(4) of the final rule Almost two-thirds of the nation’s nearly (v) Low-Income Housing Tax Credit establishes a new Regulatory Activity 26 million unsubsidized rental units Equity Investments—§ 1282.37(b)(5) for Enterprise support for financing of were owned by individuals or couples small multifamily rental properties in in 2001.103 Small-scale multifamily The Safety and Soundness Act rural areas. Section 1282.1 defines properties often are not well-capitalized, requires FHFA to consider the amount ‘‘small multifamily rental property’’ as a and their owners may struggle with the of an Enterprise’s investments and property with 5 to 50 rental units. This costs and processes that are critical grants in projects that assist in meeting Regulatory Activity was not included in when managing tenants and the needs of the underserved markets in the proposed rule. properties.104 evaluating the Enterprise’s Duty to The proposed rule specifically FHFA is persuaded by the comments Serve performance.105 Low-Income requested comment on what types of and its research that rural markets could Housing Tax Credit (LIHTC) equity barriers exist to rural lending for investments by the Enterprises would housing and how the Enterprises can 100 FHFA recognizes that new data was recently fall within this investments category but best address them. The proposed rule released by the USDA suggesting that the spike in FHFA, to date, has not permitted the also asked what types of Enterprise maturing Section 515 mortgages may be later than was anticipated when this comment letter was Enterprises to make LIHTC equity activities could help build institutional submitted. The latest data released by USDA on this investments during their capacity and expertise among market topic is at: http://www.sc.egov.usda.gov/data/data_ conservatorships. participants serving rural areas. A files.html. The proposed rule did not include number of commenters identified 101 William Apgar & Shekar Narasimhan, Joint Center for Housing Studies, ‘‘Enhancing Access to any specific provisions on Enterprise barriers to rural lending and discussed Capital for Smaller Unsubsidized Multifamily LIHTC equity investments, but what the Enterprises could do about Rental Properties,’’ p. 6 (RR07–8) (Harvard requested comment on a number of these challenges. One nonprofit University, March 2007), available at http:// related issues. Numerous commenters www.jchs.harvard.edu/sites/jchs.harvard.edu/files/ organization that specializes in rural rr07-8_apgar.pdf. provided responses to FHFA’s housing responded that there is a great 102 Id. at 11. questions, with the views expressed need for financing to preserve rural 103 Id. at 13. small multifamily properties. The 104 Id. at 11, 15. 105 See 12 U.S.C. 4565(d)(2)(D).

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generally falling into three broad of private investors, while giving the Treasury Department sweeps the categories: (i) Duty to Serve credit Enterprises flexibility to respond to Enterprises’ profits. should be permitted only for targeted or underserved market needs. After considering the comments, limited Enterprise LIHTC equity Among this first group, a housing FHFA is persuaded that despite a investments; (ii) Duty to Serve credit advocacy organization recommended vibrant LIHTC equity investment market should be permitted for Enterprise providing Duty to Serve credit based on in some areas of the country, other LIHTC equity investments with few or the condition and long-term limited areas have significant LIHTC no restrictions; and (iii) FHFA should affordability of the project at the end of equity needs that the Enterprises could maintain its prohibition on all LIHTC- the LIHTC compliance period, rather safely assist. The financial crisis did not related activities by the Enterprises. than by geographic targeting. A affect all regions of the country equally. After considering the comments, nonprofit organization involved in Certain parts of the country, including under § 1282.37(b)(5) of the final rule, lending, developing, and managing cities such as New York and San Enterprise LIHTC equity investments affordable properties highlighted several Francisco, have avoided the sharp will be eligible for Duty to Serve credit specific markets needing LIHTC equity decrease in LIHTC demand and prices, in rural areas only. FHFA will consider investment: (1) Long-term Section 8 and affordable housing construction in the extent to which an Enterprise’s properties; (2) 4 percent LIHTC these areas has continued on pace. In LIHTC equity investments serve high- preservation projects; (3) rural housing; fact, the demand for LIHTC equity needs rural regions and populations (4) Native American housing; (5) investments in affluent urban markets during the evaluation process and may assisted living housing for low-income has escalated, with prices reaching as provide greater Duty to Serve credit for elderly households; and (6) supportive high as $1.17 per $1.00 of LIHTCs. It such investments. Any Enterprise housing with intensive supportive would not currently serve the purposes LIHTC equity investments are services. of the Duty to Serve for the Enterprises conditioned on receiving a separate The second group of commenters, to re-enter these markets because the approval of the investments by FHFA as including both Enterprises, a trade Enterprises could displace private conservator. The comments received organization, and a nonprofit housing investors, as pointed out by some and the final rule provision concerning developer, preferred that Duty to Serve commenters. LIHTC equity investments are discussed credit be available for Enterprise LIHTC Other areas of the country, notably below. equity investments with few or no certain rural regions, have seen the A majority of the commenters, restrictions. The commenters stated that demand for LIHTC equity investments consisting primarily of nonprofit there is an ongoing need for unrestricted disappear, with fewer LIHTC projects organizations and policy advocacy Enterprise support, especially for being completed during and following organizations, fell into the first group, projects outside of major banks’ the financial crisis. A 2014 report found favoring providing Duty to Serve credit Community Reinvestment Act (CRA) that the proportion of LIHTC-financed only for targeted or limited Enterprise assessment areas. Fannie Mae and a housing units developed in rural re-entry into the LIHTC equity private nonprofit investor and lender communities fell by 69 percent between investment market. Many of these specializing in financing affordable 1987 and 2010.106 More specifically, in commenters favored targeting any housing and community development 1987, 24 percent of all LIHTC-financed LIHTC equity investments made by the specifically objected to limiting housing was developed in rural areas,107 Enterprises to certain geographic areas Enterprise LIHTC equity investments to but in 2010, this percentage had or limited by other specific criteria, with pre-determined geographic areas, dropped to 7.5 percent.108 The report some commenters favoring volume caps. arguing that this would preclude the Several policy advocacy organizations, a Enterprises from investing in multi- determined that this decline resulted in nonprofit organization, and a banking investor funds. large part from a 97 percent reduction trade association recommended that if Commenters in this group also in funding for the Section 515 Rural the Enterprises are allowed to re-enter recommended that the Enterprises be Rental Housing Loan program, which the LIHTC equity investment market, positioned to serve as ‘‘investors of last many LIHTC projects had used to keep resort’’ should the LIHTC equity market rents low enough to serve the most FHFA should require targeting of the 109 investments to underserved areas where soften. They stated that in order to be vulnerable populations in rural areas. Enterprise support is most needed, able to respond quickly and effectively This has had a material impact as the including rural markets and high-needs to changing market conditions, the absence of LIHTC funding has translated rural regions such as Indian Country. A Enterprises must have organizational into less money being available for nonprofit organization commented that structures and staff in place with projects serving very low-, low-, and Enterprise LIHTC equity investment in expertise in LIHTC equity investments. moderate-income families in certain rural areas is needed because rural A smaller third group of commenters, areas, primarily rural areas. projects cannot offer the economies of which included a banking trade After considering the comments and scale or the profit potential needed to association, an organization for LIHTC available data, FHFA has determined attract financing or LIHTC equity investors, and several housing advocacy that, under the final rule, Enterprise investment from large commercial organizations, favored prohibiting all LIHTC equity investments in rural areas lenders. A nonprofit intermediary LIHTC-related activities by the will be eligible for Duty to Serve credit, favored Duty to Serve credit for LIHTC Enterprises. Their general view was that equity investments in properties the demand for LIHTCs is extremely 106 See National Rural Housing Coalition, ‘‘Rural America’s Rental Housing Crisis—Federal Strategies assisted under the statutorily- high and that Enterprise re-entry into to Preserve Access to Affordable Rental Housing in enumerated affordable housing the LIHTC equity investment market Rural Communities,’’ 17–18 (2014) [hereinafter preservation programs and in rural areas would drive prices higher, drive private cited ‘‘Coalition Study’’], available at http:// with persistent poverty. Commenters investors out of the market, and obstruct ruralhousingcoalition.org/wp-content/uploads/ 2014/07/NRHC-Rural-America-Rental-Housing- stated that restricting the Enterprises to banks’ CRA compliance. A nonprofit Crisis_FINALV3.compressed.pdf. LIHTC equity investments in limited housing organization stated that 107 See Coalition Study, 17. areas would prevent the distortion of Enterprise LIHTC equity investments 108 See id. LIHTC equity prices and the pricing out should not be allowed because the 109 See Coalition Study, 16–17.

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subject to approval of such investments the same time, community banks face High-needs rural regions largely by FHFA as conservator. In addition, for less encompassing CRA oversight than overlap with areas outside of the banks’ the reasons discussed below, FHFA has large banks and, therefore, generally CRA assessment areas,118 and FHFA determined that it may provide greater lack the same CRA incentives to invest considered limiting Duty to Serve credit Duty to Serve credit for LIHTC equity in LIHTC projects.114 Community banks for Enterprise LIHTC equity investments investments that support properties also have simpler means available to to high-needs rural regions and located in high-needs rural areas or that comply with their CRA requirements populations. Several nonprofit serve high-needs rural populations. than investing in LIHTC projects.115 organizations and policy advocacy While the final rule does not designate While targeting Duty to Serve organizations advised that Middle Enterprise LIHTC equity investments as assistance to areas outside of CRA Appalachia, the Lower Mississippi a stand-alone Regulatory Activity, an assessment areas could be an effective Delta, colonias, and persistent poverty Enterprise Plan could have LIHTC approach in theory, this would be counties all share high incidences of equity investment as an objective within operationally difficult and burdensome poverty and housing problems, and a Regulatory Activity or within an in practice. The federal banking likewise that Native Americans on Additional Activity for the rural market. regulators responsible for CRA Tribal Lands and agricultural workers For example, an Enterprise could compliance (FDIC, FRB, and OCC) experience a disproportionate amount of include LIHTC equity investment in a permit each bank to define its own CRA inadequate housing. A nonprofit small Section 515 project as an objective assessment area according to a set of organization stated that projects in these under the Regulatory Activity for guidelines, and the banks’ lists of CRA specific high-needs rural regions lie in supporting small multifamily properties assessment areas are not readily ‘‘lending deserts’’ and face significant in rural areas. publicly available. In addition, the hurdles in acquiring the equity needed FHFA considered limiting Duty to banks’ CRA assessment areas may to finance affordable housing.119 A Serve credit to Enterprise LIHTC equity fluctuate on a yearly basis.116 FHFA has policy advocacy organization and a investments in rural areas outside of determined that it would be impractical nonprofit organization specializing in CRA assessment areas but determined for the Enterprises to maintain locale- rural markets recommended that all that this was not operationally feasible, by-locale information on banks’ Enterprise LIHTC investments be despite the needs of these areas. One individual CRA assessment areas. No limited to high-needs rural regions and study found that LIHTC projects in non- commenter identified a method for populations. CRA assessment areas garnered between consistently defining and identifying After considering the comments and $0.10 and $0.24 less per $1.00 in non-CRA assessment areas.117 needs in the overall rural market, FHFA LIHTCs than projects in CRA is striking a balance by making LIHTC assessment areas.110 In fact, some non- Correctives,’’ pp. 4–5 (Dec. 2009), available at equity investments in all rural areas http://www.jchs.harvard.edu/sites/ eligible for Duty to Serve credit under CRA projects received as much as $0.35 jchs.harvard.edu/files/disruption_of_the_lihtc_ 111 the final rule, and by indicating that less per LIHTC project. Lower pricing program_2009_0.pdf; Buzz Roberts, ‘‘Modifying means less equity and a higher debt CRA to Attract LIHTC Investments,’’ 13 (Federal FHFA may choose to provide greater burden for projects, which makes them Reserve Bank of St. Louis, CAO 925 11/09) Duty to Serve credit for LIHTC equity [hereinafter cited ‘‘Roberts Article’’], available at investments in high-needs rural areas or less affordable to low- and moderate- https://www.stlouisfed.org/∼/media/Files/PDFs/ income tenants.112 that serve high-needs rural populations Community%20Development/LIHTC.pdf. in the Evaluation Guidance. FHFA These pricing disparities may be 114 See generally 12 CFR part 228, subpart B, affected by incentives that banks have available at http://www.ecfr.gov/cgi-bin/text-idx? acknowledges that serving rural areas under the CRA. CRA ratings are SID=f07982420e6efaeb841c66f8580b323e&mc= through LIHTC equity investments—and true&node=pt12.3.228&rgn=div5#se12.3.228_121. principally driven by the location of high-needs rural regions and National Community Reinvestment Coalition, ‘‘A populations in particular—will present banks’ deposits, with the result that the Brief Description of CRA,’’ available at http:// largest, most densely populated cities www.ncrc.org/programs-a-services-mainmenu-109/ considerable challenges. High-needs and money centers attract the most CRA policy-and-legislation-mainmenu-110/the- 113 community-reinvestment-act-mainmenu-80/a-brief- banks, and then used branch locations to proxy for investment from the largest banks. At description-of-cra-mainmenu-136. A bank assessment areas. See CohnReznick, ‘‘The unfamiliar with LIHTCs usually requires 6 to 12 Community Reinvestment Act and Its Effect on 110 CohnReznick, ‘‘The Community Reinvestment months to make an LIHTC equity investment Housing Tax Credit Pricing,’’ p. 21 (2013), available Act and Its Effect on Housing Tax Credit Pricing,’’ decision after a CRA-relevant project receives an at https://www.cohnreznick.com/sites/default/files/ pp. 7–8, 45 (2013), available at https://www.cohn LIHTC allocation. Roberts Article, p. 14. CohnReznick_CRAStudy.pdf. _ reznick.com/sites/default/files/CohnReznick 115 National Community Reinvestment Coalition, 118 See generally Housing Assistance Council, CRAStudy.pdf. ‘‘A Brief Description of CRA,’’ available at http:// ‘‘The Community Reinvestment Act and Mortgage 111 Id. at 45. www.ncrc.org/programs-a-services-mainmenu-109/ Lending in Rural Communities,’’ pp. 25–26 (Jan. 112 See generally Patrick Barbolla, ‘‘Prepared policy-and-legislation-mainmenu-110/the- 2015), available at http://www.ruralhome.org/ Testimony for a Hearing on the Low-Income community-reinvestment-act-mainmenu-80/a-brief- storage/documents/publications/rrreports/rrr-cra- Housing Tax Credit in front of the U.S. Senate description-of-cra-mainmenu-136. Smaller in-rural-america.pdf); Charles Wehrwein, Banking, Housing and Urban Affairs Committee’s community banks also face minimum investment NeighborWorks America, ‘‘Community Subcommittee on Housing and Transportation’’ requirements for multi-investor funds, which often Reinvestment Act: Interagency Questions and (May 12, 1999), available at http:// start at around $1 million per investor. See Answers Regarding Community Reinvestment’’ p. 1 www.banking.senate.gov/99_05hrg/051299/ generally Roberts Article, p. 14. Direct investment (Nov. 3, 2014) (comment letter), available at http:// barbolla.htm. minimums can be even higher. See id. www.neighborworks.org/Documents/AboutUs_ 113 CohnReznick, ‘‘The Community Reinvestment 116 See generally Kenneth Benton & Donna Harris, Docs/PublicPolicy_Docs/CommentLetters_Docs/ Act and Its Effect on Housing Tax Credit Pricing,’’ ‘‘Understanding the Community Reinvestment Act’s NeighborWorks-America-Comment-Letter- p. 17 (2013), available at https://www.cohn Assessment Area Requirements,’’ Consumer Community-Rei.aspx. reznick.com/sites/default/files/CohnReznick_ Compliance Outlook (First Qtr. 2014), available at 119 See Charles Wehrwein, NeighborWorks CRAStudy.pdf. In addition, federal regulations https://consumercomplianceoutlook.org/2014/first- America, ‘‘Community Reinvestment Act: specify that assessment areas may not extend quarter/understanding-cras-assessment-area- Interagency Questions and Answers Regarding substantially beyond a metropolitan statistical area requirements/. Community Reinvestment’’ p. 1 (Nov. 3, 2014) boundary. See 12 CFR 25.41(e)(4). See generally 117 The CohnReznick study referred to previously (comment letter), available at http:// Joint Center for Housing Studies of Harvard that discussed the effects of CRA on LIHTC pricing www.neighborworks.org/Documents/AboutUs_ University, ‘‘The Disruption of the Low-Income was not based upon a comprehensive listing of Docs/PublicPolicy_Docs/CommentLetters_Docs/ Housing Tax Credit Program: Causes, geographies not covered by CRA assessment areas, NeighborWorks-America-Comment-Letter- Consequences, Responses, and Proposed but instead relied on data for only 20 of the largest Community-Rei.aspx.

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rural regions and populations not only III. Evaluations, Ratings, and appropriate based on evaluation of the have significant needs, but also face Evaluation Guidance—§ 1282.36 program’s parameters and operation, greater barriers to investment, even Under the Safety and Soundness Act, pursuant to the Evaluation Guidance, compared to other rural regions. For FHFA is required to conduct an annual regarding implementation of the instance, according to comments from evaluation of the Enterprises’ activities evaluation and rating process. As in the proposed rule, FHFA will Fannie Mae and a private nonprofit to fulfill their Duty to Serve obligations prepare Evaluation Guidance for the investor and lender, multi-investor and to assign an annual rating for their Enterprises. However, the final rule funds are typically structured to include performance under each of the adjusts the nature of the Evaluation a cross-section of properties, and underserved markets.123 The final rule Guidance to better fit the three-step investors in these funds generally lack establishes a framework for the evaluation process, which is further evaluation and ratings process that control over the selection of the described below. FHFA will prepare one FHFA will use to assess each underlying projects. Instead, they rely Evaluation Guidance to be used by both on general underwriting and investment Enterprise’s Duty to Serve performance Enterprises for their three-year Plans. criteria to control risk. In response to based on the Enterprise’s The Evaluation Guidance will provide Enterprise demand for LIHTC equity implementation of its Plan during the additional guidance on the Plans, how investments in these rural markets, relevant evaluation year. As part of this FHFA will conduct the quantitative, however, syndicators could develop process, FHFA will publish its annual qualitative, and extra credit multi-investor funds targeting rural Duty to Serve evaluation and rating for assessments, how final ratings will be regions, including funds targeting high- each Enterprise, which will provide the determined, and other matters as needs rural regions and populations. public with a transparent description of appropriate. FHFA will provide the the Enterprises’ performance and The intent of the Duty to Serve rule is Enterprises with proposed Evaluation FHFA’s assessment of that performance. to create incentives for the Enterprises Guidance for the first Plan within 30 After considering the comments to engage in eligible transactions, and by days after the posting of this final rule received and further consideration of on FHFA’s Web site. The proposed limiting the Enterprises’ eligible LIHTC the evaluation and ratings process in the equity investments, FHFA intends to Evaluation Guidance will also be posted proposed rule, the final rule makes a to FHFA’s Web site, and the public will drive Enterprise innovation in rural number of significant changes to the markets. have 120 days to provide input on the proposed evaluation and ratings proposed Evaluation Guidance after its FHFA also considered the safety and process. The final rule modifies the posting on the Web site. For the first soundness of LIHTC equity investments proposed process for evaluating Plan, FHFA will publish the final in rural areas, including in high-needs Enterprise performance to use a three- Evaluation Guidance no later than the rural regions and populations, and step process as follows: (1) A time FHFA delivers comments to each found that they would not expose the quantitative assessment; (2) a qualitative Enterprise on its proposed Plan. FHFA Enterprises to inappropriate risk, as assessment; and (3) an assessment of may modify the Evaluation Guidance some commenters suggested. any extra credit-eligible activities, prior to or during the course of the Historically, foreclosure rates on LIHTC including residential economic diversity three-year period for the Evaluation properties have fallen below 1 activities, for extra Duty to Serve credit. Guidance, and the modified Evaluation percent,120 and few LIHTCs are Each of these steps will assess the Guidance will be effective for the Enterprise’s accomplishment of the recaptured.121 In addition, Fannie Mae following Plan year. objectives for the activities under each advised that while non-CRA LIHTC The section below describes the final underserved market in its Plan. As part projects and those in challenging rule provisions for the evaluation of the qualitative assessment, FHFA’s process and ratings applicable to each submarkets are often viewed as more evaluation will incorporate an risky to investors, they typically Enterprise’s Duty to Serve performance. assessment of each Enterprise’s These provisions are presented under perform as well as conventional LIHTC performance of its Plan objectives under subsections for: (a) Evaluation process; projects and are consistent with the one the following four evaluation (b) Determination of overall rating and Enterprises’ conservative risk areas—outreach, loan product, loan compliance; and (c) Evaluation management structures. Historic returns purchase, and investments and grants— Guidance. on investments and loans in LIHTC as required by the statute. projects have been competitive with At the end of each evaluation year, A. Evaluation Process similar alternative investment based on this three-step process, FHFA Consistent with the proposed rule, opportunities.122 will assign one of the following five § 1282.36(b) of the final rule provides ratings for each underserved market in that FHFA will evaluate an Enterprise’s 120 See CohnReznick, ‘‘The Low-Income Housing a Plan: Exceeds, High Satisfactory, Low performance of its Plan objectives, as Tax Credit at Year 30: Recent Investment Satisfactory, Minimally Passing, or designated by the Enterprise in its Plan Performance (2013–2014),’’ pp. 228–229 (Dec. Fails. This is a change from the four- pursuant to § 1282.32(f), under one of 2015), available at https://www.cohnreznick.com/ level rating scale in the proposed rule. the following four evaluation areas: sites/default/files/pdfs/CR_LIHTC_DEC2015.pdf. A rating of Exceeds, High Satisfactory, Outreach; loan product; loan purchase; 121 See Letter of US Bank to OCC, Federal Reserve & Security and Exchanged Commission, p. 3 (Feb. Low Satisfactory, or Minimally Passing and investments and grants. These four 10, 2012), available at https://www.sec.gov/ will constitute compliance with the evaluation areas, and the comments comments/s7-41-11/s74111-195.pdf. Duty to Serve each underserved market. received, are discussed above under 122 Office of the Comptroller of the Currency, A rating of Fails will constitute § 1282.32, which addresses the Community Affairs Department, ‘‘Low-Income noncompliance with the Duty to Serve Underserved Markets Plans. Housing Tax Credits: Affordable Housing the underserved market. The final rule Additionally, FHFA made substantive Investment Opportunities for Banks,’’ Community changes to the proposed evaluation Development Insights, p. 7 (Mar. 2014), available at also provides that on an ongoing basis http://www.occ.gov/topics/community-affairs/ FHFA will make such determinations as process set forth in § 1282.36(c). The publications/insights/insights-low-income-housing- final rule authorizes FHFA to evaluate tax-credits.pdf. 123 See 12 U.S.C. 4565(d)(1), (2). Enterprise performance using a three-

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step process: (1) A quantitative eligible activities, including residential assessment; (2) a qualitative assessment; economic diversity activities. and (3) an assessment of extra credit-

This evaluation process is a change Commenters made numerous compliance with the Duty to Serve an from the approach in the proposed rule, suggestions for the evaluation process, underserved market in a Plan. At the which would have established a scoring many of which FHFA has determined to conclusion of the quantitative framework allocating points that the adopt in the final rule. These assessment for an underserved market Enterprises could earn for specific Duty suggestions included: Simplifying the in a Plan, FHFA will determine whether to Serve activities performed under their numeric scoring; more closely aligning the Enterprise receives one of the Plans. FHFA would have allocated 100 the evaluation with the objectives passing ratings, or a rating of Fails. potential scoring points that an detailed in the Plans; clarifying the In the qualitative assessment, FHFA Enterprise could potentially earn in criteria used to assess Enterprise will evaluate the Enterprise’s each underserved market, with extra performance; improving how the accomplishment of each objective for credit for residential economic diversity evaluation process captures objectives each activity in an underserved market activities as long as the score for the that may not be inherently numeric or in its Plan, based on the method and market did not exceed 100 points. yield results in the short-term; criteria that FHFA will establish in the Although a few trade associations and modifying the scoring framework to Evaluation Guidance, such as how policy advocacy organizations encourage the Enterprises to undertake skillfully an objective was implemented, appreciated the transparency of the more challenging activities; and adding the impact of the objective, and such proposed approach, the majority of flexibility in the evaluation process to other criteria as FHFA may set forth in commenters—including several policy accommodate shifts in the market, the Evaluation Guidance. advocacy organizations, nonprofit innovation, and the degree to which the Based on the outcome of the organizations, governmental entities, Enterprises are responsive to quantitative and qualitative trade associations, and both underserved market needs. assessments, FHFA will assign a rating Enterprises—found the proposed Section 1282.36(c) of the final rule for the Enterprise’s performance for process and scoring framework highly specifies that the evaluation process each underserved market. If an prescriptive and overly complex. will comprise a three-step process. The Enterprise’s rating is not changed due to Fannie Mae commented that first step will evaluate the level of the awarding of extra credit as described managing to the proposed point system accomplishment of the objectives in below, this rating will be the final rating might create an incentive for the each underserved market in an for the Enterprise’s performance for an Enterprises to take actions that optimize Enterprise’s Plan (quantitative underserved market in its Plan. The scores rather than responding to the assessment). The second step will Evaluation Guidance will describe how needs and opportunities in the evaluate how well the Enterprise the ratings are determined. underserved markets. Among its performed the objectives and their In the third step of the evaluation suggested improvements, Fannie Mae impact (qualitative assessment). The process, FHFA will assess the recommended that FHFA consider third step will evaluate each Enterprise’s performance of any extra adapting FHFA’s annual Enterprise Enterprise’s achievement of any extra credit-eligible activities, including conservatorship scorecard approach for credit-eligible activities, based on the residential economic diversity activities the Duty to Serve evaluation process. qualitative assessment factors, for which and objectives that have been included Freddie Mac stated that the evaluation the Enterprise could receive Duty to in the Enterprise’s Plan. The assessment and rating process should not be Serve extra credit. will be based on the method and criteria mechanical or based on rigid criteria. In the quantitative assessment, FHFA that FHFA will establish in the Referencing the Community will evaluate the level of an Enterprise’s Evaluation Guidance, such as how Reinvestment Act evaluation accomplishment of each objective in an skillfully the Enterprise implemented framework, Freddie Mac suggested underserved market in its Plan. In the the objective, the impact of the FHFA consider permitting ‘‘substantial Evaluation Guidance, FHFA will objective, and such other criteria as compliance’’ with its objectives as provide the method and level of FHFA may set forth in the Evaluation sufficient to be considered in accomplishment needed for the Guidance. Depending upon the outcome compliance with the Duty to Serve. objectives to receive a passing rating for of FHFA’s assessment, extra credit

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could increase an Enterprise’s rating. apply more meaningful distinctions to Commenters, including several policy Rating levels are described in detail its evaluation of an Enterprise’s advocacy organizations, a trade below. Since an Enterprise cannot performance of its Plan objectives. association, and both Enterprises, also receive a rating higher than Exceeds, provided feedback on the appropriate C. Ongoing Assessment of Evaluation extra credit cannot increase an Exceeds timing for the Evaluation Guide. Both and Rating Process rating. Nevertheless, FHFA will Enterprises expressed concerns with the recognize these achievements of the Because the process by which FHFA proposed timing and sequencing of the Enterprise in FHFA’s written evaluation will evaluate and rate the Enterprises’ Evaluation Guide. Freddie Mac of the Enterprise’s performance for the compliance with the final rule is new recommended that guidance be made year. Extra credit may not be awarded and in an effort to consider the available to the Enterprises substantially where an Enterprise has received a appropriate balance between in advance of the required submission rating of Fails for an underserved compliance and regulatory burden, of the Plans to FHFA. Fannie Mae stated market in a Plan. Residential economic FHFA considers it appropriate to do that being advised of FHFA’s scoring diversity activities are further discussed ongoing assessments of the operational methodology just 30 days before below in Section IV. or other practical implications of the implementing a Plan could require mid- course corrections and potentially B. Determination of Overall Rating and rating process. This will allow both disrupt planned activities. Under the Compliance FHFA and the Enterprises to begin fulfilling the intent of the Duty to Serve proposed rule process, FHFA would At the end of the evaluation year, statute, while also recognizing that have developed the Evaluation Guide FHFA will award a separate rating for FHFA may wish to adjust the for each Enterprise after the Enterprises’ each underserved market based on the implementation of the evaluation and Plans were finalized, based on the quantitative, qualitative, and extra rating process over time. For this reason, Enterprises’ Plans and public input credit-eligible activities assessments. § 1282.36(c)(4)(ii) of the final rule received on the proposed Plans. Section 1282.36(c)(4) of the final rule provides that FHFA will make such FHFA finds the commenters’ provides that an Enterprise will receive determinations as appropriate based on arguments persuasive and has revised one of five ratings: Exceeds, High evaluation of the program’s parameters the nature and timing of the Evaluation Satisfactory, Low Satisfactory, and operation, pursuant to the Guidance. Section 1282.36(d)(1) of the Minimally Passing, or Fails. The final Evaluation Guidance, regarding final rule provides that FHFA will rule revises the proposed rule process implementation of the rating process. prepare one Evaluation Guidance for by eliminating the conversion of a 100 both Enterprises, on a three-year cycle. point numeric scale specific to an D. Evaluation Guidance This revises the approach in the Enterprises’ Plan into a final rating. In proposed rule, which would have Section 1282.36(d) of the final rule addition, the final rule includes provided an annual Evaluation Guide to requires that FHFA prepare Evaluation Minimally Passing as a fifth rating each Enterprise specifically tailored to Guidance—a change in name from the category, which was not included in the its Plan. This change is based on the proposed rule which used the term proposed rule Commenters generally change in the nature of the Evaluation ‘‘Evaluation Guide.’’ The final rule’s supported the proposed approach of Guidance in the final rule, which will description of the content of the using rating categories to evaluate an be applicable to both Enterprises and Evaluation Guidance is different from Enterprise’s performance under its Plan, not specifically tailored to an individual that of the proposed rule because, as with some suggesting FHFA consider a Plan. The change also aligns the timing discussed above, the evaluation process rating structure with more tiers. A trade of the Evaluation Guidance with the association, for example, commented and scoring system are changed from Plan cycle. In addition, as described that the proposed rule’s increase in the the proposed rule. The final rule states below, the final rule allows for number of ratings categories from the that the Evaluation Guidance will modification of the Evaluation pass/fail ratings in the 2010 Duty to provide additional guidance on the Guidance, which can address changes in Serve proposed rule would provide Plans, how the quantitative, qualitative, circumstances, markets, or updates to greater incentives for the Enterprises and extra credit assessments will be the Enterprises’ Plans. and help stakeholders identify areas for conducted, how final ratings will be In order to provide the Enterprises improvement in the Enterprises’ determined, and such other matters as with sufficient time to develop quality activities under the Duty to Serve. may be appropriate. draft Plans that are responsive to Several policy advocacy organizations The final rule revises the process FHFA’s expectations and public input, and one governmental entity outlined in the proposed rule, which § 1282.36(d)(3) of the final rule provides recommended expanding the proposed stated that FHFA would issue to each that the first proposed Evaluation four rating categories to five to enable Enterprise an Evaluation Guide Guidance will be provided to the FHFA to provide more meaningful specifically tailored to its Plan after the Enterprises within 30 days after the distinctions in evaluations and ratings. Enterprises delivered their final Plans to posting of the final rule on FHFA’s Web FHFA finds the comments compelling FHFA. Commenters, including a site, and posted to FHFA’s Web site as that the final rule should add a fifth governmental entity, a trade soon as practical thereafter. FHFA will rating category of Minimally Passing. organization, several nonprofit lenders, provide timelines for the Evaluation The Minimally Passing rating will fall several policy advocacy organizations, Guidance for subsequent Plans after the above the Fails rating and below the and both Enterprises, supported the first Plan, including public input Low Satisfactory rating. The Minimally proposed requirement that FHFA periods, 300 days before the termination Passing rating will convey that an provide guidance on how it will date of the Plan in effect, or a later date Enterprise has met a minimally evaluate Enterprise compliance. Several if additional time is necessary. compliant level of its Plan objectives but policy advocacy organizations, a In discussing the importance of could better use its resources to fulfill governmental entity, and a trade clearly defining evaluation criteria the intentions of the Duty to Serve organization also recommended that through guidance, one policy advocacy statute and regulation. Adding this fifth FHFA seek public input on the organization suggested that FHFA be rating category will allow FHFA to Evaluation Guides. permitted to adjust its evaluation

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criteria during a Plan cycle as the results opportunity area; or (2) mixed-income credit, but only if the Enterprise is able of initial efforts reveal new information. housing in an area of concentrated to substantiate the affordability of FHFA finds that providing Evaluation poverty. Definitions of these terms are homes in the manufactured housing Guidance for a three-year period, which discussed below. community to very-low, low-, or can remain the same over time where moderate-income households through Qualifying Activities for Residential appropriate, but which can also be Economic Diversity use of the methodology in modified when there are lessons learned § 1282.38(f)(1) or another methodology and best practices are developed, is Section 1282.1 of the final rule FHFA has approved. appropriate. For this reason, the final defines qualifying ‘‘residential Consistent with the proposed rule, the rule provides that FHFA may modify economic diversity activities’’ to mean final rule excludes Enterprise support the Evaluation Guidance prior to or all eligible activities in the underserved for energy or water efficiency during the three-year cycle and may markets except energy or water improvement activities from qualifying obtain additional public input on the efficiency improvement activities and for extra credit, as FHFA continues to Evaluation Guidance. The modified any additional activities determined by view these activities as insufficiently Evaluation Guidance would be effective FHFA to be ineligible. The proposed related to residential economic for the subsequent evaluation year. rule would have excluded Enterprise diversity. FHFA agrees with the commenters’ support for energy or water efficient common theme that the Evaluation improvement activities from receiving Definition of ‘‘High Opportunity Areas’’ Guidance should help provide residential economic diversity extra Section 1282.1 of the final rule accountability for Duty to Serve credit because they typically do not defines ‘‘high opportunity area’’ implementation. Accordingly, relate to the location of housing and, primarily to mean an area designated by § 1282.36(d)(3) of the final rule requires thus, do not appear to further residential HUD as a Difficult-to-Develop Area the Evaluation Guidance to be issued economic diversity. The proposed rule (DDA) during any year covered by a first as proposed Evaluation Guidance, also would have excluded Enterprise Plan or in the year prior to a Plan’s with a 120-day period for the public to support for financing of manufactured effective date, whose poverty rate is provide input on the proposed housing communities from receiving lower than the rate specified by FHFA Evaluation Guidance to FHFA and the residential economic diversity extra in the Evaluation Guidance. DDAs are Enterprises. However, in order to credit because the Enterprises generally areas where it is difficult to create implement the Plans in a timely fashion do not have complete information on affordable housing due to high rents and retain operational flexibility, FHFA residents’ monthly housing costs, which relative to area median income, and may revise the length of time the public is necessary to determine the they are generally considered to be a will have to provide input on proposed affordability of the community. The proxy for higher opportunity areas. HUD Evaluation Guidance for subsequent rule’s census tract proxy methodology is required to identify DDAs by the Plans. for determining the affordability of a LIHTC statute and does so annually.124 community (the income level of the IV. Extra Credit-Eligible Activities, The definition in the final rule also census tract) assumes that a allows the Enterprises to utilize certain Including Residential Economic community’s affordability matches the Diversity Activities—§ 1282.36(c)(3) state or local definitions of high incomes of nearby residents, which opportunity areas from a geographically- As the third step of the evaluation and means it is not useful for determining applicable LIHTC Qualified Allocation rating process, the final rule designates whether a community contributes to Plan (QAP).125 two categories of extra credit-eligible residential economic diversity. The The proposed rule would have activities: (1) Residential economic proposed rule specifically requested defined ‘‘high opportunity areas’’ only diversity activities, and (2) other comment on whether this was the as DDAs. The proposed rule specifically activities that may be identified by appropriate scope for the proposed extra requested comment on whether the FHFA as eligible for extra credit in the credit. proposed definition is the most A number of policy advocacy and Evaluation Guidance. FHFA will appropriate, whether the definition governmental organizations establish the method and criteria for should use DDAs to define high recommended that FHFA treat evaluating these extra credit-eligible opportunity areas outside of Enterprise manufactured housing activities in the Evaluation Guidance. metropolitan areas, and whether there is community activities as eligible for a factor-based definition that would be A. Residential Economic Diversity extra credit under residential economic preferable. The proposed rule also asked Activities diversity, and some noted that outside whether state-defined high opportunity Consistent with the proposed rule, data can in some cases substantiate areas (or similar terms) should be § 1282.36(c)(3) of the final rule provides whether these activities contribute to incorporated in the definition, and if so, that the Enterprises may receive Duty to residential economic diversity. Some how this could be implemented by the Serve extra credit, which may be nonprofit and governmental Enterprises. factored into their evaluation ratings, if organizations also recommended that Several policy advocacy and their qualifying activities within an energy efficiency improvement nonprofit organizations directly underserved market in their Plans activities be eligible for extra credit, as supported the proposed definition due contribute to residential economic they may contribute to residential to its empirical and straightforward diversity. FHFA will evaluate an stability. Enterprise’s performance of qualifying After considering the comments, nature. Freddie Mac commented that residential economic diversity activities FHFA agrees that manufactured housing FHFA should clarify how to address using the qualitative assessment factors. communities may contribute to annual changes in the areas HUD As proposed, the final rule defines a residential economic diversity. identifies as DDAs because the ‘‘residential economic diversity Accordingly, the final rule allows 124 26 U.S.C. 42(d)(5)(B)(iii). activity’’ as an Enterprise activity in Enterprise manufactured housing 125 LIHTC Qualified Allocation Plans govern the connection with mortgages on: (1) community activities to qualify for allocation of 9 percent LIHTCs. See 26 U.S.C. Affordable housing in a high residential economic diversity extra 42(m)(B).

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Enterprises are being asked to plan their parties have created, none of which is development in higher opportunity Duty to Serve activities for three years federally sanctioned. Further, FHFA areas without explicitly defining or at a time. Neither Freddie Mac nor believes that the Enterprises could using the terminology ‘‘high Fannie Mae commented in favor of or in easily operationalize the DDA-based opportunity areas,’’ which means FHFA opposition to the proposed definition. definition and incorporate it into their cannot always determine whether a Critics of using DDAs exclusively as systems. QAP offers a usable definition for Duty a proxy for high opportunity areas noted However, FHFA agrees that DDAs are to Serve purposes. States and localities that because HUD’s DDA calculation not a perfect proxy for high opportunity also may encourage activities in high methodology is used as an allocation areas. In addition, promoting residential opportunity areas using methods that do mechanism for limited tax credits under economic diversity is subject to much not allow FHFA to reach a firm the LIHTC program, it has a 20 percent experimentation. FHFA is addressing conclusion on whether an area is nationwide population cut-off (applied these concerns in the final rule in two definitively a high opportunity area or separately to metropolitan and non- ways. First, the final rule requires a not. At the same time, states and metropolitan areas). As a result of this maximum poverty level for a HUD- localities employ different indicators for limit, many high opportunity areas are designated DDA to qualify as a high high opportunity areas. not designated as DDAs. Other opportunity area. As one commenter As a result of these challenges, the commenters noted that four states have suggested, this will eliminate higher- final rule utilizes DDAs, with a poverty no DDAs in 2016. Because of these poverty areas that are unlikely to be level threshold, as the primary reasons, multiple nonprofit and areas of opportunity. FHFA will definition of high opportunity areas. governmental organizations establish this poverty rate threshold for However, the rule also permits the recommended use of a modified version each Plan period in the Evaluation Enterprises to use approved state and of HUD’s methodology without the Guidance. In setting this poverty rate local definitions of high opportunity national population cut-off. A policy threshold, FHFA will balance its desire areas in geographically-applicable QAPs advocacy organization suggested that to exclude high-poverty DDAs from its that meet specific criteria. The specific FHFA pair HUD’s DDA designations definition of high opportunity areas criteria FHFA will use to allow state and with a poverty indicator in order to with its desire to ensure that its local definitions will be described in the ensure that areas designated as high definition covers a reasonable segment proposed Evaluation Guidance, which opportunity do not have of the population. To address Freddie will be subject to public input. The final disproportionately high poverty rates. Mac’s concern about annual changes in Evaluation Guidance will consider Some nonprofit organizations the areas HUD designates as DDAs, the submissions received during the public recommended that FHFA employ an final rule allows any area meeting the input period and identify the state and opportunity index developed by an poverty threshold and designated as a local definitions of high opportunity outside party. A larger number of DDA by HUD in the year before the Plan areas that FHFA will accept for the nonprofit and governmental takes effect or during any of the three duration of the Plan period. If states and organizations suggested that FHFA defer years of the Plan to qualify as a high localities continue to refine their to or incorporate state or local opportunity area. definitions of high opportunity areas definitions of high opportunity areas, Second, the final rule allows state and and expand the use of tools allowing such as those put forth in an LIHTC local definitions of high opportunity stakeholders to clearly identify those QAP. Additionally, some nonprofit areas in LIHTC QAPs to qualify where areas, FHFA envisions utilizing state organizations stated that FHFA should they meet certain criteria. State and and local definitions to a greater degree continue working to develop an ideal local definitions of high opportunity in subsequent Plan periods. definition of a high opportunity area, areas can be tailored to a locale’s unique Definition of ‘‘Area of Concentrated potentially by opening a separate circumstances and may change over Poverty’’ comment period on definitions related time. Many states in recent years have to residential economic diversity. experimented with new definitions of, The final rule considers activities in After considering the comments, and means of encouraging activity in, areas of concentrated poverty that FHFA has determined that it should rely high opportunity areas in their QAPs. facilitate financing of mixed-income on a pre-existing government definition From 2013 to 2015, 19 states added housing as promoting residential or index to measure high opportunity language to their QAPs related to high economic diversity. Section 1282.1 of areas. Neither FHFA nor the Enterprises opportunity areas.126 For a definition of the final rule defines an ‘‘area of provide affordable housing subsidies, a high opportunity area in a QAP to concentrated poverty’’ as a census tract which can play a more direct role in qualify as a high opportunity area under designated by HUD as a ‘‘Qualified driving the location of affordable the final rule, it will have to be Census Tract’’ (QCT) or a ‘‘Racially- or housing than the activities the specifically identified by FHFA in the Ethnically-Concentrated Area of Enterprises will undertake in support of final Evaluation Guidance. Poverty’’ (R/ECAP) in the year before the Duty to Serve. As a result, FHFA There are considerable operational the Plan takes effect or during any of the wishes to align its residential economic barriers to allowing the Enterprises to three years of the Plan. The proposed diversity policy with other federal utilize all state and local QAP rule would have defined ‘‘area of policy efforts. Additionally, creating an definitions of high opportunity areas for concentrated poverty’’ only as HUD- opportunity index would be highly Duty to Serve purposes. States and designated QCTs. labor intensive. While DDAs have limits localities may attempt to promote QCTs are generally census tracts as a proxy for high opportunity areas, where 50 percent of households have they are widely understood by the 126 These definitions are explored and catalogued incomes below 60 percent of the area affordable housing community and play in National Housing Trust, ‘‘Preservation and median income or that have a poverty a central role in the LIHTC market. Opportunity Neighborhoods in the Low Income rate of 25 percent or more.127 HUD is While a variety of opportunity indices Housing Tax Credit Program’’ (2015), available at http://prezcat.org/related-catalog-content/ required by the LIHTC statute to could in fact be useful, no commenters preservation-and-opportunity-neighborhoods-low- suggested how FHFA should choose income-housing-tax-credit (last accessed July 28, 127 For the 2016 QCTs, see 80 FR 73201 (Nov. 24, among the many indices that outside 2016). 2015).

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identify QCTs, and does so annually.128 designated Promise Zones would be definition should contain a minimum R/ECAPs are generally census tracts useful for purposes of denoting areas of percentage of units that are affordable to with (i) a non-white population of 50 concentrated poverty subject to very low-, low-, or moderate-income percent or more and (ii) a poverty rate revitalization plans. The proposed rule households. Setting a minimum of 40 percent or more, or that is three also asked whether other consistent threshold would ensure that the mixed- or more times the average tract poverty criteria could be applied for this income housing the Enterprises are rate for the metro/micro area, whichever purpose. encouraged to support serves a wide is lower.129 Commenters were divided on this diversity of income levels. While one The proposed rule specifically topic. A number of nonprofit nonprofit organization noted that there requested comment on whether FHFA organizations supported using CNI, is inadequate research to empirically should consider other or additional Promise Zones, or other federal guide setting unit and income definitions of ‘‘area of concentrated designations for purposes of thresholds for mixed-income housing, a poverty,’’ such as a definition similar to determining whether Enterprise state housing finance agency suggested HUD-designated R/ECAPs. Some activities are part of or contribute to a that FHFA consider the standards set nonprofit and governmental revitalization plan in an area of out in the LIHTC program. organizations explicitly supported concentrated poverty, while several A nonprofit organization FHFA’s proposed definition because other nonprofit and governmental recommended that FHFA allow QCTs cover a wider band of lower- organizations opposed it, partially developments with a significant share of income neighborhoods than R/ECAPs. because revitalization plans are more unrestricted units (available to Some nonprofit organizations favored typically led by states or localities. households of any income) to be eligible defining ‘‘areas of concentrated Among those who were supportive, for extra credit, regardless of whether poverty’’ as HUD-designated R/ECAPs some offered tepid support for utilizing the area’s current market rent is without elaborating on their rationale. CNI or Promise Zones, noting that there unaffordable to households at or below Other nonprofit and governmental are a limited number of these areas. One moderate-income levels. This organizations recommended that FHFA commenter suggested that FHFA also commenter argued that generally market consider an area to qualify if it is allow state and local definitions of rents in areas of concentrated poverty designated as either a QCT or an R/ revitalization plans to qualify, while are relatively affordable, at least in the ECAP because this would encompass a another commenter suggested FHFA near term. larger number of low-income areas than hold a separate comment period on FHFA agrees that the proposed utilizing either designation by itself. utilizable definitions. definition of ‘‘mixed-income housing’’ There are considerably more QCTs FHFA continues to find that it cannot could be strengthened to ensure the (13,619 census tracts) than R/ECAPs adequately identify revitalization plans Enterprises are encouraged to support (4,161 census tracts). Additionally, or implement in the Duty to Serve sustainable mixed-income housing that QCTs and R/ECAPs generally overlap; process the diverse definitions set out serves a diversity of income levels. only 600 R/ECAPs (14 percent) are not for these plans by states and localities. However, given that an appropriate also QCTs. These 600 census tracts, Accordingly, the final rule does not add standard may differ between markets however, contain 2.3 million a revitalization component to residential and may change over time, the residents.130 Therefore, using R/ECAPs economic diversity. definition will be spelled out in the in addition to QCTs helps to identify Evaluation Guidance, rather than in the Definition of ‘‘Mixed-Income Housing’’ additional underserved areas with final rule. FHFA plans to specify in its higher poverty levels that would benefit Section 1282.1 of the final rule proposed Evaluation Guidance that from Enterprise activities under the defines ‘‘mixed-income housing’’ as a mixed-income housing must contain a Duty to Serve. For these reasons, the multifamily property or development— minimum share of affordable units that final rule includes R/ECAPs in the which may include or comprise single- mirrors the requirements set out in the definition of ‘‘area of concentrated family units—that serves very low-, LIHTC program (20 percent of units poverty.’’ low-, or moderate-income families, must be affordable for households with where: (i) A minimum percentage of incomes at or below 50 percent of area Revitalization in Areas of Concentrated units as specified in the Evaluation median income, or 40 percent of units Poverty Guide are unaffordable to low-income must be affordable to households with In the proposed rulemaking, FHFA families, or to families at higher income incomes at or below 60 percent of area considered but did not provide that the levels as specified therein; and (ii) a median income).131 FHFA finds that Enterprises may receive extra credit minimum percentage of units as this well-known metric of affordability when their activities are part of or specified in the Evaluation Guide are is the best standard available at this contribute to revitalization plans in affordable to low-income families, or to time. areas of concentrated poverty. FHFA families at lower income levels as FHFA also recognizes that, in areas of also did not set forth criteria for specified therein. The proposed rule concentrated poverty, market rents may identifying such plans. The proposed would have defined ‘‘mixed-income be relatively affordable, which means rule specifically requested comment on housing’’ to require that at least 25 developers may face difficultly at least whether CNI and HUD/USDA- percent of the units are affordable only initially in attracting higher-income to households with incomes above households to these developments. This 128 26 U.S.C. 42(d)(5)(B)(ii). moderate-income levels. could make it difficult to finance 129 HUD’s approach is described in U.S. FHFA specifically requested comment properties that meet the requirement for Department of Housing and Urban Development, ‘‘AFFH Data Documentation,’’ (2016), available at on whether the proposed definition is a certain percentage of units that are https://www.hudexchange.info/resources/ appropriate, including whether unaffordable to moderate-income documents/AFFH-Data-Documentation.docx (last minimum thresholds for the percentage households specified in the proposed accessed July 28, 2016). Outside of Core-Based of units affordable to very low-, low, or rule. However, FHFA still finds that a Statistical Areas (CBSAs), the racial/ethnic concentration threshold is set at 20 percent. moderate-income households should be minimum threshold of units for higher- 130 Analysis based on 2016 DDA and 2013 R/ included. A number of nonprofit ECAP data from HUD. organizations suggested that the 131 26 U.S.C. 42(g)(1).

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income households is important in with the proposed rule, and in improvements on existing multifamily order to ensure that mixed-income accordance with the statutory rental properties meeting the housing is not solely occupied by very provisions, § 1282.37(b)(1) of the final requirements in § 1282.34(d)(2) are low- or low- income households. The rule provides that contributions to the eligible for Duty to Serve credit. These threshold of units that must be Housing Trust Fund 132 and the Capital subordinate liens extend the useful life unaffordable to low-income households, Magnet Fund,133 and Enterprise of the property and also enhance the or to households at higher income mortgage purchases funded with such overall value of the property by levels, will also be specified in the grant amounts, are ineligible for Duty to reducing operating expenses. Evaluation Guide. At this time, FHFA Serve credit. This prohibition is Subordinate liens on single-family plans to specify that mixed-income discussed further above in the properties. As proposed, § 1282.37(b)(4) housing must include at least 20 percent discussion on Other Federal Affordable of the final rule excludes subordinate of units that are affordable only to Housing Programs. liens on most single-family properties households with incomes above low- HOEPA mortgages. As proposed, from receiving Duty to Serve credit, income levels. § 1282.37(b)(2) of the final rule prohibits including subordinate liens for energy Duty to Serve credit for HOEPA efficiency improvements on single- B. Other Activities Identified in the mortgages.134 A federal regulator family properties. However, in a change Evaluation Guidance as Eligible for commented that loans for manufactured from the proposed rule, subordinate Extra Credit homes are more likely to be classified as liens on shared appreciation loans that Under the final rule, FHFA may also ‘‘high-cost’’ loans under HOEPA, and a meet all of the requirements in designate in the Evaluation Guidance policy advocacy organization supported § 1282.34(d)(4) are eligible for Duty to other activities as extra credit-eligible excluding HOEPA mortgages from Serve credit. As one nonprofit activities. This would not require the receiving Duty to Serve credit because organization commented, these liens are Enterprises to undertake any activity they do not adequately protect unlike standard second lien mortgages. designated as eligible for extra credit. consumers. A manufactured housing They are due upon the sale of the Instead, it would provide an incentive trade association suggested that FHFA property and typically have no interest. for the Enterprises to include those lacks the legal authority to require Moreover, the borrower does not make designated activities in their Plans. In consumer protections on manufactured monthly payments on these second determining whether to designate an home loans as a condition of eligibility liens, except where there is a modest activity as eligible for extra credit, to received Duty to Serve credit. FHFA interest rate payment that covers the FHFA will consider whether the activity has determined that it possesses such cost of program implementation, asset could be considered more challenging, authority, and that Enterprise support management, and ongoing monitoring. or whether it serves a part of an for HOEPA mortgages, whether for In effect, these second liens are vehicles underserved market that is relatively manufactured home loans or for for maintaining the subsidy with the less well-served. For example, activities mortgages for site-built homes, would property when the property is sold. such as serving high-needs rural not fulfill the purposes of the Duty to Under the final rule, not all shared populations or manufactured housing Serve. appreciation loans are eligible for Duty communities with tenant pad lease Subordinate liens on multifamily to Serve credit. Those not eligible are protections could foreseeably be properties. As proposed, § 1282.37(b)(3) proprietary shared appreciation loans, designated as eligible for extra credit of the final rule prohibits Duty to Serve where an investor receives part of the due to their challenging nature. This credit for subordinate liens on equity in exchange for making the home approach also responds to commenters, multifamily properties, except for affordable for a single buyer only. Such as described above, who encouraged subordinate liens originated for energy loans do not preserve the affordability of FHFA to modify the proposed or water efficiency improvements on the unit for subsequent buyers. evaluation and ratings approach to multifamily rental properties that meet LIHTC equity investments. Section encourage the Enterprises to undertake the requirements in § 1282.34(d)(2). 1282.37(b)(5) of the final rule prohibits more challenging activities. Fannie Mae commented that Duty to Serve credit for LIHTC equity subordinate loans for capital investments in a property, except where V. General Requirements for Credit— improvements to expand the useful life the property is located in a rural area. § 1282.37 or significantly improve the condition LIHTC equity investments are discussed Section 1282.37 of the final rule sets or quality of a property and that result above under the rural markets under forth general counting requirements for in preserving affordability should § 1282.35. whether and how activities or objectives receive Duty to Serve creditable. Given Permanent construction take-out may receive Duty to Serve credit. With the regulatory and statutory restrictions loans and Additional Activities under some exceptions, the counting rules and on most affordable properties, FHFA the affordable housing preservation other requirements are similar to those had determined that subordinated loans market. Section 1282.37(b)(6) of the in the proposed rule and FHFA’s for capital improvements are not an final rule provides that Duty to Serve housing goals regulation. FHFA effective tool to preserve affordability at credit will not be provided for received few comments on these this time. In addition, it is not a permanent construction take-out loans provisions. standard practice in the industry to and Additional Activities under the allow subordinate loans for preserving affordable housing preservation market, A. No Credit Under Any Evaluation except as provided in § 1282.37(c). The Area—§ 1282.37(b) affordability, as these could present excessive risk to investors in the exceptions are discussed above under Section 1282.37(b) of the final rule subordinate loan. the affordable housing preservation identifies specific Enterprise activities Under the final rule, subordinate liens market under § 1282.34. that are not eligible to receive Duty to for energy or water efficiency Serve credit under any evaluation area, B. No Credit Under Loan Purchase Evaluation Area—§ 1282.37(d) as discussed below. 132 See 12 U.S.C. 4565(d)(4). Housing Trust Fund and Capital 133 See 12 U.S.C. 4569(h)(7). Consistent with the proposed rule, Magnet Fund contributions. Consistent 134 See 15 U.S.C. 1602(bb). § 1282.37(d) of the final rule sets forth

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activities that are not eligible to receive F. Credit Under Multiple Underserved Serve credit will be provided under the Duty to Serve credit under the loan Markets—§ 1282.37(h) loan purchase evaluation area. purchase evaluation area, even if the As proposed, § 1282.37(h) of the final C. Credit for Rental Units—Use of activity would otherwise receive credit rule provides that an activity or Rent—§ 1282.38(d)(1) under § 1282.38. These include objective, including financing of As proposed, § 1282.38(d)(1) of the generally: Mortgage purchases on dwelling units by an Enterprise’s final rule provides that for Enterprise secondary residences; single-family mortgage purchase, that is eligible for mortgage purchases financing single- refinancing mortgages resulting from Duty to Serve credit will receive such family rental units and multifamily conversion of balloon notes to fully credit under each underserved market rental units, affordability is determined amortizing notes if the Enterprise for which the activity or objective based on rent and whether the rent is already owns the balloon note at the qualifies in that year. For example, if a affordable to the income groups targeted time conversion occurs; purchases of borrower uses a Section 8 voucher 135 to by the Duty to Serve. A rent is mortgages that previously received Duty help buy a manufactured home in the affordable if the rent does not exceed to Serve credit within the immediately Lower Mississippi Delta, and if an the maximum levels as provided in preceding five years; mortgage Enterprise subsequently purchases that § 1282.19. purchases where the property or any loan, the purchase would receive Duty units therein have not been approved to Serve credit under the manufactured D. Credit for Rental Units—Affordability for occupancy; any interests in housing, affordable housing of Rents Based on Housing Program mortgages that FHFA determines will preservation, and rural markets. Requirements—§ 1282.38(d)(2) not be treated as interests in mortgages; Consistent with the proposed rule, and purchases of state and local VI. General Requirements for Loan § 1282.38(d)(2) of the final rule provides government housing bonds except as Purchases—§ 1282.38 that where a multifamily property is provided in § 1282.39(h). In order to be eligible to receive Duty to Serve credit for loan purchases, a subject to an affordability restriction C. FHFA Review of Activities or loan must be on housing affordable to under a housing program that Objectives—§ 1282.37(e) very low-, low-, or moderate income establishes the maximum permitted income level of a tenant or a prospective Consistent with the proposed rule, families, regardless of whether the tenant or the maximum permitted rent, § 1282.37(e) of the final rule provides property is owner-occupied or rental. the affordability of units in the property that FHFA may determine whether and Sections 1282.17, 1282.18, and 1282.19 may be determined based on the how any activity or objective will of part 1282 define ‘‘affordability’’ for maximum permitted income level or receive Duty to Serve credit under an owner-occupied and rental units. The maximum permitted rent established underserved market in a Plan, including tables in these sections adjust the under such housing program for those treatment of missing data, and FHFA maximum percentage of area median units, subject to certain restrictions set will notify each Enterprise in writing of income based on family size and the forth in the rule. any determination regarding the size of the dwelling unit, as measured treatment of any activity or objective. by the number of bedrooms. E. Missing Data or Information for Section 1282.37(e) also adds a provision A. Counting Dwelling Units— Rental Units—1282.38(e)(2) that was not included in the proposed § 1282.38(b) Under § 1282.38(e)(2) of the final rule, rule which requires FHFA to make any Consistent with the proposed rule, when an Enterprise lacks sufficient such determinations available to the § 1282.38(b) of the final rule provides information on the rents, the public on FHFA’s Web site. that performance under the loan Enterprise’s performance regarding the D. Year in Which Activity or Objective purchase evaluation area will be rental units may be evaluated using Will Receive Credit—§ 1282.37(f) measured by counting dwelling units estimated affordability information, affordable to very low-, low-, and except that an Enterprise may not As proposed, § 1282.37(f) of the final moderate-income families. estimate affordability of rental units for rule provides that an activity or purposes of receiving extra credit for objective eligible for Duty to Serve B. Credit for Owner-Occupied Units— residential economic diversity activities. credit will receive such credit in the § 1282.38(c) As proposed, the final rule provides that year in which it is completed. FHFA As proposed, § 1282.38(c) of the final estimated affordability information is may determine that credit is appropriate rule provides that mortgage purchases calculated by multiplying the number of for an activity or objective in which an financing owner-occupied single-family rental units with missing affordability Enterprise engages, but does not properties will be evaluated based on a information in properties securing the complete in a particular year, except comparison of the income of the mortgages purchased by the Enterprise that activities or objectives under the mortgagor(s) to the area median income in each census tract by the percentage loan purchase evaluation area will at the time the mortgage was originated, of all moderate-income rental dwelling receive credit in the year in which the using the appropriate percentage factor units in the respective tracts, as Enterprise purchased the mortgage. in § 1282.17. If the income of the determined by FHFA. 136 E. Credit Under One Evaluation Area— mortgagor(s) is not available, no Duty to The housing goals regulation § 1282.37(g) applies a 5 percent limit on the number 135 The Housing Opportunity through of rental units with missing rent data for As proposed, § 1282.37(g) of the final Modernization Act of 2016 provides that Section 8 which an Enterprise may estimate vouchers may be used for payment of notes on rule provides that an activity or manufactured homes. See Housing Opportunity affordability of rents. The proposed rule objective eligible for Duty to Serve through Modernization Act of 2016, sec. 112, Public specifically requested comment on credit will receive such credit under Law 114–201, 130 Stat. 782 (July 29, 2016), whether there are better methods than only one evaluation area in a particular available at https://www.gpo.gov/fdsys/pkg/PLAW- the proposed methodology to estimate 114publ201/pdf/PLAW-114publ201.pdf. The underserved market. The rationale for provision on Section 8 vouchers for manufactured affordability when rent information is this provision is discussed above under homes has not been implemented as of the time of the Plan objectives under § 1282.32(f). this rule. 136 12 CFR 1282.15(e)(3).

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missing, and whether the Duty to Serve purchases and are eligible to receive condominium project will be treated as rule should cap the number of units Duty to Serve credit under the loan a mortgage purchase. with missing data for which an purchase evaluation area. E. Seasoned Mortgages—§ 1282.39(f) Enterprise could estimate affordability. No commenters addressed these A. Credit Enhancements—§ 1282.39(b) Consistent with the proposed rule, questions. In FHFA’s experience with Consistent with the proposed rule, § 1282.39(f) of the final rule provides the housing goals, the Enterprises have § 1282.39(b) of the final rule identifies that an Enterprise’s purchase of a not come close to reaching the 5 percent the specific circumstances under which seasoned mortgage will be treated as a limit. Because the rent rolls determine dwelling units financed under a credit mortgage purchase. enhancement entered into by an the viability of a property as an F. Purchase of Refinancing Mortgages— Enterprise will be treated as mortgage investment, the Enterprises generally § 1282.39(g) obtain this information and use it as purchases. As proposed, § 1282.39(g) of the final part of their underwriting. Accordingly, B. Risk-Sharing—§ 1282.39(c) consistent with the proposed rule, rule provides that an Enterprise’s § 1282.38(e)(2) of the final rule does not Consistent with the proposed rule, purchase of a refinancing mortgage will include a limit on the number of rental § 1282.39(c) of the final rule provides be treated as a mortgage purchase only units for which an Enterprise may that mortgages purchased under risk- if the refinancing is an arms-length estimate affordability each year. sharing arrangements between an transaction that is borrower-driven. In a change from the proposed rule, Enterprise and any federal agency under which the Enterprise is responsible for G. Mortgage Revenue Bonds— § 1282.38(e)(2) of the final rule does not § 1282.39(h) permit the Enterprises to estimate a substantial amount of the risk will be affordability of rental units when rent treated as mortgage purchases. Fannie Consistent with the proposed rule, data are missing for purposes of Mae commented that this provision § 1282.39(h) of the final rule provides receiving extra credit for residential would have the effect of excluding loans that the purchase or guarantee by an economic diversity activities. Estimating under a number of FHA, USDA, and Enterprise of a mortgage revenue bond affordability under the methodology Veterans Administration programs from issued by a state or local housing discussed above would assume that a receiving Duty to Serve credit. finance agency will be treated as a multifamily development’s affordability The Duty to Serve counting rules are purchase of the underlying mortgages mirrors the income characteristics of the structured such that unless a particular only to the extent the Enterprise has tract in which it is located, which is not loan type is specifically identified as sufficient information to determine useful for determining whether the being ineligible to receive Duty to Serve whether the underlying mortgages or development contributes to residential credit, it is eligible to receive credit mortgage-backed securities serve the economic diversity as defined in the provided the borrower income and other income groups targeted by the duty to final rule. requirements in the rule are satisfied. serve. Thus, § 1282.39(c) does not exclude H. Seller Dissolution Option— F. Credit for Blanket Loans on from receiving credit Enterprise § 1282.39(i) Manufactured Housing Communities— purchases of Title 1 loans, USDA § 1282.38(f) Section 502 and 538 loans, Section 184 As proposed, § 1282.39(i) of the final Section 1282.38(f) of the final rule Indian Home Loan Guarantee Program rule sets forth the specific sets forth how determinations of loans, Section 542(b) loans, or other circumstances under which mortgages affordability of manufactured housing similar types of loans. The only loans acquired by an Enterprise through communities will be made. These that § 1282.39(c) specifically excludes transactions involving seller dissolution determinations are discussed above in from receiving credit are mortgages options will be treated as mortgage the manufactured housing market purchased under risk-sharing purchases. section. arrangements between an Enterprise and VIII. Failure To Comply; Housing a federal agency where the Enterprise is Plans—§§ 1282.40, 1282.41 G. Application of Median Income— not responsible for a substantial amount § 1282.38(g) of the risk. The Safety and Soundness Act Consistent with the proposed rule, provides that the Duty to Serve C. Participations—§ 1282.39(d) § 1282.38(g) of the final rule includes underserved markets is enforceable to provisions on determining an area’s As proposed, § 1282.39(d) of the final the same extent and under the same median income. rule provides that participations enforcement provisions as are purchased by an Enterprise will be applicable to the Enterprise housing H. Newly Available Data—1282.38(h) treated as mortgage purchases only goals, except as otherwise provided.137 As proposed, § 1282.38(h) of the final when the Enterprise’s participation in Accordingly, under § 1282.40 of the rule provides that when data is used to the mortgage is 50 percent of more. final rule, if an Enterprise has not determine whether a dwelling unit complied with, or there is a substantial D. Cooperative Housing and receives Duty to Serve credit under the probability that an Enterprise will not Condominiums—§ 1282.39(e) loan purchase evaluation area and new comply with, the Duty to Serve a data is released after the start of a As proposed, § 1282.39(e) of the final particular underserved market in a calendar quarter, the new data need not rule provides that the purchase of a given year, FHFA will determine be used until the start of the following mortgage on a cooperative housing unit whether compliance by the Enterprise quarter. (share loan) or on a condominium unit with the activities and objectives in its will be treated as a mortgage purchase, Plan is or was feasible. In determining VII. Special Requirements for Loan with affordability determined based on feasibility, FHFA will consider factors Purchases—§ 1282.39 the income of the mortgagor(s). The such as market and economic Section 1282.39 of the final rule final rule also provides that the conditions and the financial condition provides that the activities identified in purchase of a blanket mortgage on a this section will be treated as mortgage cooperative building or on a 137 12 U.S.C. 4566(a)(4).

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of the Enterprise. If FHFA determines changed the name of this report to the certain narrative information from each that compliance is or was feasible, ‘‘second quarter’’ report in the final rule Enterprise’s second quarter report for FHFA will follow the procedures in 12 but has retained the requirements of the that year, omitting data on loan U.S.C. 4566(b). ‘‘semi-annual’’ report from the proposed purchases and any additional A determination of a failure to comply rule. FHFA changed the name of this confidential or proprietary information, means that an Enterprise has received a report in order to more closely follow within a reasonable time after receiving rating of Fails under its Plan for a the naming convention for reports under the second quarter report. The proposed particular underserved market in a the housing goals, and because the name rule did not specifically address public given year. A determination of a ‘‘semi-annual report’’ may imply that disclosure of the reports or how any substantial probability that an the report is due twice a year, though confidential or proprietary data or Enterprise will fail to comply means the final rule states that the report is due information in the reports would be that there is a substantial probability only once a year after the second treated. that the Enterprise will receive a rating quarter. When discussing comments Several policy advocacy organizations of Fails under its Plan for a particular below that referenced this report, FHFA supported the proposed reporting underserved market in a given year. refers to it as the ‘‘semi-annual’’ report requirements, and no commenters Consistent with the proposed rule, for ease of reference because that is the specifically opposed the proposed § 1282.41 of the final rule includes terminology used by the commenters requirements. As further discussed requirements for an Enterprise to submit and in the proposed rule. below, two policy advocacy to FHFA a housing plan, in the As proposed, § 1282.66(c) of the final organizations suggested FHFA consider Director’s discretion, if the Director rule provides that the annual report having the Enterprises report on all determines that the Enterprise did not must include information on the activities and objectives quarterly and comply with, or there is a substantial Enterprise’s performance on all of the provide that information to the public. probability that an Enterprise will not activities and objectives in its Plan for The commenters proposed this as one comply with, the Duty to Serve a each underserved market during the way to allow the public to weigh in on particular underserved market. There evaluation year. At a minimum, the the next cycle’s Plans with information were no comments specifically annual report must include: Narrative on Enterprises’ performance in the final addressing enforcement. and summary statistical information for year of the current Plan cycle. Several IX. Enterprise Duty To Serve Reporting the Plan objectives over the evaluation policy advocacy organizations noted to FHFA—§ 1282.66 year, supported by appropriate that a significant amount of time could transaction-level data (which was elapse between when the Enterprises Consistent with the proposed rule, discussed in the proposed rule); a submit their annual reports to FHFA § 1282.66 of the final rule requires the description of the Enterprise’s market and when FHFA finalizes its evaluation Enterprises to submit to FHFA quarterly opportunities for purchasing loans for the Enterprises’ Duty to Serve reports on the activities and objectives during the evaluation year, to the extent compliance. Given this timeline in in their Plans for each underserved data is available; the volume of FHFA’s proposed reporting market. The fourth quarterly report will qualifying loans purchased by the requirements, these commenters stated serve as and be termed the annual Enterprise during the evaluation year; a that FHFA should meet with market report. comparison of the Enterprise’s loan participants in order to learn from them As proposed, § 1282.66(a) of the final purchases with those in prior years; and how the Plans are operating and the rule provides that the first and third a comparison of market opportunities challenges the Enterprises may face in quarter reports must include detailed with the size of the relevant markets in accomplishing their objectives. year-to-date information on the the past, to the extent data is available. FHFA has determined that the reports Enterprise’s progress toward meeting Market opportunities for purchasing as detailed in § 1282.66 will provide the activities and objectives in its Plan loans could include market or FHFA with information necessary to only for the loan purchase evaluation regulatory factors that may affect monitor and evaluate Enterprise area for each underserved market. lenders’ decisions to retain loans in compliance with their Plans. FHFA has Section 1282.66(a) of the final rule portfolio or sell them, the availability also determined that the reporting provides that the first and third quarter and pricing of credit enhancements requirements are not likely to create reports are due to FHFA within 60 days from third parties, and competition from operational concerns for the Enterprises, after the end of the quarter. other secondary market participants. given their experience with FHFA’s As proposed, § 1282.66(b) of the final Section 1282.66(c) provides that the reporting requirements for the housing rule provides that the second quarter annual report is due to FHFA within 75 goals. report must include detailed year-to- days after the end of each calendar year. Although FHFA did not specifically date information on the Enterprise’s Section 1282.66(d) of the final rule request comment on whether the progress toward meeting all of the provides that FHFA will make public Enterprises’ reports should be made activities and objectives in its Plan for information from the first quarter, public, both Enterprises and several each underserved market. Section second quarter, and third quarter reports policy advocacy organizations and 1282.66(b) also requires that the second within a reasonable time after the end nonprofit organizations provided quarter report contain narrative and of the calendar year for which they comments on the extent to which the summary statistical information for the apply. FHFA will make public reports should be made public. Fannie Plan objectives, supported by information from the annual report Mae requested that FHFA make the appropriate transaction-level data within a reasonable time after its annual report public but not the first (which was discussed in the proposed receipt. FHFA will omit any quarter, semi-annual, and third quarter rule). Section 1282.66(b) provides that confidential and proprietary reports because these reports will the second quarter report is due to information from the information it contain information on its progress FHFA within 60 days after the end of provides to the public from the toward meeting the activities and the second quarter. In the proposed rule, Enterprises’ reports. During the final objectives in its Plan and include FHFA referred to this report as the year of the three-year period covered by confidential and proprietary data. ‘‘semi-annual’’ report. FHFA has a Plan, FHFA will also make public Freddie Mac recommended that none of

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the reports be publicly disclosed proposed new Plans to FHFA in the XI. Regulatory Flexibility Act because they would disclose third year of their current three-year The Regulatory Flexibility Act (5 information that would reveal Freddie Plans. The commenter pointed out that U.S.C. 601 et seq.) requires that a Mac’s progress and that would influence without public access to information on regulation that has a significant the Enterprises’ development of the Enterprises’ performance on their economic impact on a substantial additional initiatives. Freddie Mac current Plans during the third year, the number of small entities, small recommended that, at the very least, public would have to review and businesses, or small organizations must parts of each report should be provide input on the Enterprises’ include an initial regulatory flexibility considered confidential, in order to proposed new Plans without complete analysis describing the regulation’s allow for even competition between the information on the Enterprises’ impact on small entities. Such an Enterprises and among other market performance to date. Because analysis need not be undertaken if the participants. information on Enterprise progress on agency has certified that the regulation In contrast, a policy advocacy all of their Plan activities and objectives will not have a significant economic organization recommended that all of will be included in their semi-annual impact on a substantial number of small the reports be made public so that the reports, the commenter recommended entities. (5 U.S.C. 605(b)). FHFA has public could review the reports and that FHFA disclose and invite public considered the impact of this rule under play a role in holding the Enterprises input on the semi-annual reports in the Regulatory Flexibility Act. The accountable and in helping develop considering the Enterprises’ proposed General Counsel of FHFA certifies that their subsequent Plans. A nonprofit new Plans. Alternatively, the this rule will not have a significant organization echoed this commenter proposed requiring the recommendation without providing a Enterprises to report on all of their Plan economic impact on a substantial reason, and commented that the public activities and objectives quarterly, at number of small entities because the versions should include protections for least in the final year of the three-year rule applies to the Enterprises, which proprietary information and sensitive Plan, so that FHFA could receive more are not small entities for purposes of the content. Another nonprofit organization robust information from the public as it Regulatory Flexibility Act. stated that the annual report should be considers the Enterprises’ proposed new List of Subjects in 12 CFR Part 1282 made public in order to make the Duty Plans. Another policy advocacy Mortgages, Reporting and to Serve process transparent. organization that advocated for all of the recordkeeping requirements. After considering the comments, reports to be made public echoed this FHFA is persuaded that public input on recommendation. Authority and Issuance certain information in the Enterprises’ After considering the comments, For the reasons stated in the reports can provide valuable FHFA has concluded that it would be preamble, under the authority of 12 information for FHFA’s evaluation beneficial for the public to have greater U.S.C. 4501, 4502, 4511, 4513, 4526, process and the development of the information about Enterprise and 4561–4566, FHFA amends part subsequent Plans. At the same time, performance during the third year of the 1282 of subchapter E of 12 CFR chapter FHFA is mindful that public access to Enterprises’ Plans in order to be able to XII, as follows: information in the Enterprise’s reports provide more informed input to FHFA should not compromise the Enterprises’ on the Enterprises’ subsequent proposed PART 1282—ENTERPRISE HOUSING progress in meeting their Plan activities Plans. Accordingly, § 1282.66(d) of the GOALS AND MISSION and objectives during the evaluation final rule provides that FHFA will make year, especially where the reports public certain narrative information ■ 1. The authority citation for part 1282 contain confidential or proprietary data derived from the Enterprises’ second continues to read as follows: or information. In considering the quarter reports, omitting loan purchase Authority: 12 U.S.C. 4501, 4502, 4511, Enterprises’ concern about revealing data as well as any confidential and 4513, 4526, 4561–4566. their progress under their Plans, FHFA proprietary data or information, at a has determined that public release of reasonable time after receiving the ■ 2. In § 1282.1(b), add the definitions data under the loan purchase evaluation second quarter reports in the third year of ‘‘Additional Activity’’, ‘‘Agricultural area during the evaluation year could of the Plans. Although this approach worker’’, ‘‘Area of concentrated impair the Enterprises’ activity in the would reveal some information about poverty’’, ‘‘Colonia’’, ‘‘Community underserved market. Accordingly, the Enterprises’ progress on their Plans development financial institution’’, § 1282.66(d) of the final rule provides during that evaluation year, FHFA has ‘‘Evaluation Guidance’’, ‘‘Federally that FHFA will make public information determined that risk to the Enterprises insured credit union’’, ‘‘Federally derived from the Enterprises’ first would be mitigated by omitting data recognized Indian tribe’’, ‘‘High-needs quarter, second quarter, and third under the loan purchase evaluation rural population’’, ‘‘High-needs rural quarter reports, omitting any area. Providing the public with some region’’, ‘‘High opportunity area’’, confidential and proprietary information derived from the second ‘‘Indian area’’, ‘‘Insured depository information and data, at a reasonable quarter reports could facilitate stronger institution’’, ‘‘Lower Mississippi Delta’’, time after the end of the calendar year public input that could sharpen the ‘‘Manufactured home’’, ‘‘Manufactured for which they apply. This will mitigate Plans that will cover the next three housing community’’, ‘‘Middle the concerns the Enterprises expressed years. Appalachia’’, ‘‘Mixed-income housing’’, about revealing their progress under ‘‘Persistent poverty county’’, their Plans. FHFA will make public X. Paperwork Reduction Act ‘‘Regulatory Activity’’, ‘‘Resident-owned information derived from the The final rule does not contain any manufactured housing community’’, Enterprises’ annual reports, omitting information collection requirement that ‘‘Residential economic diversity any confidential and proprietary data, would require the approval of OMB activity’’, ‘‘Rural area’’, ‘‘Small financial within a reasonable time after receiving under the Paperwork Reduction Act (44 institution’’, ‘‘Small multifamily rental them. U.S.C. 3501 et seq.). Therefore, FHFA property’’, ‘‘Statutory Activity’’, and A policy advocacy organization noted has not submitted any information to ‘‘Underserved Markets Plan’’, in that the Enterprises will submit their OMB for review. alphabetical order to read as follows:

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§ 1282. 1 Definitions. (i) Middle Appalachia; (i) A minimum percentage of the units * * * * * (ii) The Lower Mississippi Delta; are unaffordable to low-income families, (b) * * * (iii) A colonia; or or to families at higher income levels, as Additional Activity, for purposes of (iv) A tract located in a persistent specified in the Evaluation Guide; and subpart C of this part, means an activity poverty county and not included in (ii) A minimum percentage of the in an Enterprise’s Underserved Markets Middle Appalachia, the Lower units are affordable to low-income Plan that is not a Statutory Activity or Mississippi Delta, or a colonia. families, or to families at lower income Regulatory Activity. High opportunity area, for purposes of levels, as specified in the Evaluation Agricultural worker, for purposes of subpart C of this part, means: Guide. subpart C of this part, means any person (i) An area designated by HUD as a ‘‘Difficult Development Area,’’ pursuant * * * * * that meets the definition of an Persistent poverty county, for to 26 U.S.C. 42(d)(5)(B)(iii), during any agricultural worker under a federal, purposes of subpart C of this part, year covered by an Underserved state, tribal or local program. means a county in a rural area that has Markets Plan or in the year prior to an had 20 percent or more of its population * * * * * Underserved Markets Plan’s effective Area of concentrated poverty, for living in poverty over the past 30 years, date, whose poverty rate is lower than purposes of subpart C of this part, as measured by the most recent the rate specified by FHFA in the means a census tract designated by HUD Evaluation Guidance; or successive decennial censuses. as a Qualified Census Tract, pursuant to (ii) An area designated by a state or * * * * * 26 U.S.C. 42(d)(5)(B)(ii), or as a Racially- local Qualified Allocation Plan as a high Regulatory Activity, for purposes of or Ethnically-Concentrated Area of opportunity area and which meets a subpart C of this part, means an activity Poverty, pursuant to 24 CFR 5.152, definition FHFA has identified as in an Enterprise’s Underserved Markets during any year covered by an eligible for duty to serve credit in the Plan that is designated as a Regulatory Underserved Markets Plan or in the year Evaluation Guidance. Activity in §§ 1282.33(c), 1282.34(d), or prior to a Plan’s effective date. * * * * * 1282.35(c). * * * * * Indian area, for purposes of subpart C * * * * * Colonia, for purposes of subpart C of of this part, has the meaning in 24 CFR Resident-owned manufactured this part, means an identifiable 1000.10. housing community, for purposes of community that meets the definition of Insured depository institution, for subpart C of this part, means a a colonia under a federal, State, tribal, purposes of subpart C of this part, manufactured housing community for or local program. means an institution whose deposits are which the terms and conditions of Community development financial insured under the Federal Deposit residency, policies, operations and institution, for purposes of subpart C of Insurance Act (12 U.S.C. 1811 et seq.). management are controlled by at least this part, has the meaning in 12 CFR * * * * * 51 percent of the residents, either 1263.1. Lower Mississippi Delta, for purposes directly or through an entity formed * * * * * of subpart C of this part, means the under the laws of the state. Evaluation Guidance, for purposes of Lower Mississippi Delta counties Residential economic diversity subpart C of this part, means separate designated by Public Laws 100–460, activity, for purposes of subpart C of this FHFA-prepared guidance that includes 106–554, and 107–171, along with any part, means an eligible Enterprise the information required under this future updates made by Congress. activity, other than an energy or water subpart, as well as additional guidance Manufactured home, for purposes of efficiency improvement activity or other on the Underserved Markets Plans, how subpart C of this part, means a activity that FHFA determines to be the quantitative and qualitative manufactured home as defined in ineligible, in connection with mortgages assessments will be conducted, the role section 603(6) of the National on: of extra credit for extra-credit eligible Manufactured Housing Construction (i) Affordable housing in a high activities such as residential economic and Safety Standards Act of 1974, as opportunity area; or diversity, how final ratings will be amended, 42 U.S.C. 5401 et seq., and (ii) Mixed-income housing in an area determined, and other matters as may be implementing regulations. of concentrated poverty. appropriate. Manufactured housing community, * * * * * * * * * * for purposes of subpart C of this part, Rural area, for purposes of subpart C Federally insured credit union, for means a tract of land under unified of this part, means: purposes of subpart C of this part, has ownership and developed for the (i) A census tract outside of a the meaning in 12 U.S.C. 1752(7). purposes of providing individual rental metropolitan statistical area as Federally recognized Indian tribe, for spaces for the placement of designated by the Office of Management purposes of subpart C of this part, has manufactured homes for residential and Budget; or the meaning in 25 CFR 83.1. purposes within its boundaries. (ii) A census tract in a metropolitan * * * * * * * * * * statistical area as designated by the High-needs rural population, for Middle Appalachia, for purposes of Office of Management and Budget that purposes of subpart C of this part, subpart C of this part, means the is outside of the metropolitan statistical means any of the following populations ‘‘central’’ Appalachian subregion under area’s Urbanized Areas as designated by provided the population is located in a the Appalachian Regional Commission’s the U.S. Department of Agriculture’s rural area: subregional classification of Appalachia. (USDA) Rural-Urban Commuting Area (i) Members of a Federally recognized * * * * * (RUCA) Code #1, and outside of tracts Indian tribe located in an Indian area; or Mixed-income housing, for purposes with a housing density of over 64 (ii) Agricultural workers. of subpart C of this part, means a housing units per square mile for High-needs rural region, for purposes multifamily property or development USDA’s RUCA Code #2. of subpart C of this part, means any of that may include or comprise single- * * * * * the following regions provided the family units that serves very low-, low- Small financial institution, for region is located in a rural area: , or moderate-income families where: purposes of subpart C of this part,

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means a financial institution with less Non-Objection from FHFA by December being tied to Plan calendar year than $304 million in assets. 1 of the prior year, the effective date for evaluation periods; and * * * * * that underserved market in the Plan will (5) Tied to analysis of market Small multifamily rental property, for be January 1 of the first evaluation year opportunities. Be based on assessments purposes of subpart C of this part, for which the Plan is applicable. Where and analyses of market opportunities in means any property of 5 to 50 rental an underserved market in a Plan does each underserved market, taking into units. not receive a Non-Objection from FHFA account safety and soundness Statutory Activity, for purposes of by December 1 of the prior year, the considerations. subpart C of this part, means an effective date for that underserved (f) Evaluation areas. Each Plan Enterprise activity relating to housing market in the Plan will be as determined objective must meet at least one of the projects under the programs set forth in by FHFA. evaluation areas set forth in 12 U.S.C. 4565(a)(1)(B) and § 1282.34(c). (d) Plan content.—(1) Consideration § 1282.36(b). An Enterprise must Underserved Markets Plan, for of minimum number of activities. The designate in its Plan the one evaluation purposes of subpart C of this part, Enterprises must consider and address area under which each Plan objective means a plan prepared by an Enterprise in their Plans a minimum number of will be evaluated. describing the activities and objectives Statutory Activities or Regulatory (g) Plan procedures.—(1) Submission it will undertake to meet its duty to Activities for each underserved market. of proposed Plans.—(i) First proposed serve each of the three underserved The minimum number will be Plan. An Enterprise’s first proposed markets. determined by FHFA and stated in the Plan must be submitted to FHFA within 90 days after FHFA posts the proposed * * * * * Evaluation Guidance as provided for in § 1282.36(d). An Enterprise will select Evaluation Guidance on FHFA’s Web ■ 3. Add subpart C to read as follows: the specific Statutory Activities or site pursuant to § 1282.36(d)(3). Subpart C—Duty to Serve Underserved Regulatory Activities to address in its (ii) Subsequent proposed Plans. For Markets Plan under this requirement. For the subsequent proposed Plans after the first activities selected by the Enterprise, the Plan, FHFA will provide timelines 300 Sec. Enterprise must address in its Plan days before the termination date of the 1282.31 General. either how it will undertake the Plan in effect, or a later date if 1282.32 Underserved Markets Plan. activities and related objectives, or the additional time is necessary, for 1282.33 Manufactured housing market. reasons why it will not undertake the proposed Plan submission, public input 1282.34 Affordable housing preservation periods, and Non-Objection to an market. activities. The statutory programs in 1282.35 Rural markets. § 1282.34(c)(5) and (c)(6) are excluded underserved market in a Plan. Unless 1282.36 Evaluations, ratings, and for this purpose. otherwise directed by FHFA, each Evaluation Guidance. (2) Additional Activities. An Enterprise must submit a proposed Plan 1282.37 General requirements for credit. Enterprise may also include in its Plan to FHFA at least 210 days before the 1282.38 General requirements for loan Additional Activities eligible to serve an termination date of the Enterprise’s Plan purchases. underserved market. For the Additional in effect. 1282.39 Special requirements for loan Activities included by the Enterprise, (2) Posting of proposed Plans. As soon purchases. the Enterprise must address in its Plan as practical after an Enterprise submits 1282.40 Failure to comply. its proposed Plan to FHFA for review, 1282.41 Housing plans. how it will undertake the activities and related objectives. FHFA will post the proposed Plan on § 1282.31 General. (3) Residential economic diversity FHFA’s Web site, with any confidential (a) This subpart sets forth the activities. If an Enterprises chooses to and proprietary data and information Enterprise duty to serve three undertake a residential economic omitted. underserved markets as required by diversity activity for extra credit under (3) Public input.—(i) For the first section 1335 of the Safety and § 1282.36(c)(3), the Enterprise must proposed Plans, the public will have 60 Soundness Act (12 U.S.C. 4565). This describe the activity and related days from the date the proposed Plans subpart also establishes standards and objectives in its Plan. are posted on FHFA’s Web site to procedures for annually evaluating and (e) Objectives. Each Statutory provide input on the proposed Plans. rating Enterprise compliance with the Activity, Regulatory Activity, and (ii) The Enterprises’ subsequent duty to serve underserved markets. Additional Activity in an Enterprise’s proposed Plans will be available for (b) Nothing in this subpart permits or Plan must comprise one or more public input pursuant to the timeframe requires an Enterprise to engage in any objectives, which are the specific action and procedures established by FHFA. activity that would otherwise be items that the Enterprises will identify (4) Enterprise review. Each Enterprise inconsistent with its Charter Act or the for each activity. Each objective must may, in its discretion, make revisions to Safety and Soundness Act. meet all of the following requirements: its proposed Plan based on the public (1) Strategic. Directly or indirectly input. § 1282.32 Underserved Markets Plan. maintain or increase liquidity to an (5) FHFA review.—(i) FHFA review of (a) General. Each Enterprise must underserved market; first proposed Plans. FHFA will review submit to FHFA an Underserved (2) Measurable. Provide measurable each Enterprise’s first proposed Plan Markets Plan describing the activities benchmarks, which may include and inform the Enterprise of any FHFA and objectives it will undertake to meet numerical targets, that enable FHFA to comments on the proposed Plan within its duty to serve each of the three determine whether the Enterprise has 60 days from the end of the public input underserved markets. Plan activities and achieved the objective; period on the proposed Plan, or such objectives may cover a single year or (3) Realistic. Be calibrated so that the additional time as may be necessary. multiple years. Enterprise has a reasonable chance of The Enterprise must address FHFA’s (b) Term of Plan. Each Enterprise’s meeting the objective with appropriate comments, as appropriate, through Plan must cover a period of three years. effort; revisions to its proposed Plan pursuant (c) Effective date of Plans. Where an (4) Time-bound. Be subject to a to the timeframe and procedures underserved market in a Plan receives a specific timeframe for completion by established by FHFA.

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(ii) FHFA review of subsequent secondary market for eligible mortgages the manufactured housing community proposed Plans. For subsequent on manufactured homes for very low-, owner; and proposed Plans after the first proposed low-, and moderate-income families. (viii) Tenant has the right to receive Plans, FHFA will establish a timeframe Enterprise activities under this section at least 60 days advance notice of a and procedures for FHFA review, must serve each such income group in planned sale or closure of the comments, and any required Enterprise the year for which the Enterprise is manufactured housing community. revisions. evaluated and rated. (d) Additional Activities. An (iii) Designation of Statutory Activity (b) Eligible activities. Enterprise Enterprise may include in its Plan other or Regulatory Activity. FHFA may, in its activities eligible to be included in an activities to serve very low-, low-, or discretion, designate in the Evaluation Underserved Markets Plan for the moderate-income families in the Guidance one Statutory Activity or manufactured housing market are manufactured housing market Regulatory Activity in each underserved activities that facilitate a secondary consistent with paragraph (b) of this market that FHFA will significantly market for mortgages on residential section, subject to FHFA determination consider in determining whether to properties for very low-, low-, or of whether the Additional Activity is provide a Non-Objection to that moderate-income families consisting of eligible to receive duty to serve credit. underserved market in a proposed Plan. manufactured homes titled as real (iv) FHFA Non-Objections to property or personal property; and § 1282.34 Affordable housing preservation market. underserved markets in a proposed manufactured housing communities. Plan. After FHFA is satisfied that all of (c) Regulatory Activities. Enterprise its comments on an underserved market activities related to the following are (a) Duty in general. Each Enterprise in a proposed Plan have been addressed, eligible to receive duty to serve credit must develop loan products and flexible FHFA will issue a Non-Objection for under the manufactured housing underwriting guidelines to facilitate a that underserved market in the Plan. market: secondary market to preserve housing (6) Effective date of an underserved (1) Manufactured homes titled as real affordable to very low-, low-, and market in a Plan. Where an underserved property. Mortgages on manufactured moderate-income families under eligible market in a Plan receives a Non- homes titled as real property; housing programs or activities. Objection from FHFA by December 1 of (2) Chattel. Loans on manufactured Enterprise activities under this section the prior year, the effective date for that homes titled as personal property, must serve each such income group in underserved market in the Plan will be including both pilot and ongoing the year for which the Enterprise is January 1 of the first evaluation year for initiatives; evaluated and rated. which the Plan is applicable. Where an (3) Manufactured housing (b) Eligible activities. Enterprise underserved market in a Plan does not communities owned by a governmental activities eligible to be included in an receive a Non-Objection from FHFA by entity, nonprofit organization, or Underserved Markets Plan for the December 1 of the prior year, the residents. Mortgages on manufactured affordable housing preservation market effective date for that underserved housing communities that are owned by are activities that facilitate a secondary market in the Plan will be as determined a governmental unit or instrumentality, market for mortgages on residential by FHFA. a nonprofit organization, or residents; properties for very low-, low-, or (7) Posting of an underserved market and moderate-income families consisting of section in a Plan. As soon as practicable (4) Manufactured housing affordable rental housing preservation after FHFA issues a Non-Objection to an communities with certain pad lease and affordable homeownership underserved market in a Plan, that protections. Manufactured housing preservation. section of the Plan will be posted on the communities with pad leases that have (c) Statutory Activities. Enterprise Enterprise’s and FHFA’s respective Web the following pad lease protections at a activities related to housing projects sites, with any confidential and minimum, or manufactured housing under the following programs in the proprietary data and information communities that are subject to state or Safety and Soundness Act (12 U.S.C. omitted. local laws requiring pad lease 4565(a)(1)(B)) are eligible to receive (h) Modification of a Plan. At any protections that equal or exceed the duty to serve credit under the affordable time after implementation of a Plan, an following pad lease protections: housing preservation market: Enterprise may request to modify its (i) One-year renewable lease term (1) Section 8. The project-based and Plan during the three-year term, subject unless there is good cause for tenant-based rental assistance housing to FHFA Non-Objection of the proposed nonrenewal; programs under section 8 of the U.S. modifications. FHFA may also require (ii) Thirty-day written notice of rent Housing Act of 1937, 42 U.S.C. 1437f; an Enterprise to modify its Plan during increases; (2) Section 236. The rental and the three-year term. FHFA and the (iii) Five-day grace period for rent cooperative housing program for lower Enterprise may seek public input on payments and right to cure defaults on income families under section 236 of proposed modifications to a Plan if rent payments; the National Housing Act, 12 U.S.C. FHFA determines that public input (iv) Tenant has the right to sell the 1715z–1; would assist its consideration of the manufactured home without having to (3) Section 221(d)(4). The housing proposed modifications. If a Plan is first relocate it out of the community; program for moderate-income and modified, the modified Plan, with any (v) Tenant has the right to sublease or displaced families under section confidential and proprietary assign the pad lease for the unexpired 221(d)(4) of the National Housing Act, information and data omitted, will be term to the new buyer of the tenant’s 12 U.S.C. 1715l; posted on the Enterprise’s and FHFA’s manufactured home without any (4) Section 202. The supportive respective Web sites. unreasonable restraint; housing program for the elderly under (vi) Tenant has the right to post ‘‘For section 202 of the Housing Act of 1959, § 1282.33 Manufactured housing market. Sale’’ signs; 12 U.S.C. 1701q; (a) Duty in general. Each Enterprise (vii) Tenant has the right to sell the (5) Section 811. The supportive must develop loan products and flexible manufactured home in place within a housing program for persons with underwriting guidelines to facilitate a reasonable time period after eviction by disabilities under section 811 of the

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Cranston-Gonzalez National Affordable utility savings generated over an moderate-income families in the Housing Act, 42 U.S.C. 8013; improvement’s expected life will exceed affordable housing preservation market (6) McKinney-Vento Homeless the cost of installation; consistent with paragraph (b) of this Assistance. Permanent supportive (4) Shared equity programs for section, subject to FHFA determination housing projects subsidized under Title affordable homeownership of whether the activities are eligible to IV of the McKinney-Vento Homeless preservation.—(i) Affordable receive duty to serve credit. Assistance Act, 42 U.S.C. 11361, et seq.; homeownership preservation through (7) Section 515. The rural rental one of the following shared equity § 1282.35 Rural markets. housing program under section 515 of homeownership programs: (a) Duty in general. Each Enterprise the Housing Act of 1949, 42 U.S.C. (A) Resale restriction programs must develop loan products and flexible 1485; administered by community land trusts, underwriting guidelines to facilitate a (8) Low-income housing tax credits. other nonprofit organizations, or state or secondary market for eligible mortgages Low-income housing tax credits under local governments or instrumentalities; on housing for very low-, low-, and section 42 of the Internal Revenue Code or moderate-income families in rural areas. of 1986, 26 U.S.C. 42; and (B) Shared appreciation loan Enterprise activities under this section (9) Other comparable state or local programs administered by community must serve each such income group in affordable housing programs. Other land trusts, other nonprofit the year for which the Enterprise is comparable affordable housing organizations, or state or local evaluated and rated. programs administered by a state or governments or instrumentalities that (b) Eligible activities. Enterprise local government that preserve housing may or may not partner with a for-profit activities eligible to be included in an affordable to very low-, low-, and institution to invest in, originate, sell, or Underserved Markets Plan for the rural moderate-income families. An service shared appreciation loans. market are activities that facilitate a Enterprise may include in its Plan (ii) A program in paragraph (d)(4)(i) secondary market for mortgages on statutory programs pursuant to this must: residential properties for very low-, paragraph (c)(9), subject to FHFA (A) Provide homeownership low-, or moderate-income families in determination that the program is opportunities to very low-, low-, or rural areas. comparable to one of the statutory moderate-income households; (c) Regulatory Activities. Enterprise programs in this paragraph (c) in the (B) Utilize a ground lease, deed activities related to the following are way it provides subsidy and preserves restriction, subordinate loan, or similar eligible to receive duty to serve credit affordable housing for the income- legal mechanism that includes under the rural market: eligible households. provisions stating that the program will (1) High-needs rural regions. Housing (d) Regulatory Activities. Enterprise keep the home affordable for subsequent in high-needs rural regions; activities related to the following are very low-, low-, or moderate-income (2) High-needs rural populations. eligible to receive duty to serve credit families, the affordability term is at least Housing for high-needs rural under the affordable housing 30 years after recordation, a resale populations; (3) Financing by small financial preservation market: formula applies that limits the institutions of rural housing. Financing (1) Financing of small multifamily homeowner’s proceeds upon resale, and by a small financial institution of rental properties. Financing of small the program administrator or its multifamily rental properties by a housing in a rural area; and assignee has a preemptive option to (4) Small multifamily rental community development financial purchase the homeownership unit from institution, insured depository properties in rural areas. Small the homeowner at resale; and multifamily rental properties that are institution, or federally insured credit (C) Support homebuyers and located in a rural area. union, where the entity’s total assets are homeowners to promote sustainable (d) Additional Activities. An $10 billion or less; homeownership, including reviewing Enterprise may include in its Plan other (2) Energy or water efficiency and pre-approving refinances and home activities to serve very low-, low-, or improvements on multifamily rental equity lines of credit. moderate-income families in rural areas properties. Energy or water efficiency (5) HUD Choice Neighborhoods consistent with paragraph (b) of this improvements on multifamily rental Initiative. The HUD Choice section, subject to FHFA determination properties provided there are Neighborhoods Initiative, as authorized of whether the activities are eligible to projections made based on credible and by 42 U.S.C. 1437v; receive duty to serve credit. generally accepted standards that the (6) HUD Rental Assistance improvements financed by the loan will Demonstration program. The HUD § 1282.36 Evaluations, ratings, and reduce energy or water consumption by Rental Assistance Demonstration Evaluation Guidance. the tenant or the property by at least 15 program, as authorized by 42 (a) Evaluation of compliance. In percent, and the energy or water savings U.S.C.1437f note; and determining whether an Enterprise has generated over an improvement’s (7) Purchase or rehabilitation of complied with the duty to serve each expected life will exceed the cost of certain distressed properties. Lending underserved market, FHFA will installation; programs for the purchase or annually evaluate and rate the (3) Energy or water efficiency rehabilitation by very low-, low-, or Enterprise’s duty to serve performance improvements on single-family, first lien moderate-income families, or by based on the Enterprise’s properties. Energy or water efficiency nonprofit organizations or local or tribal implementation of its Underserved improvements on single-family, first- governments serving such families, of Markets Plan during the relevant lien properties, provided there are homes eligible for short sale, homes evaluation year. FHFA’s evaluation will projections made based on credible and eligible for foreclosure sale, or be in accordance with separate, FHFA- generally accepted standards that the properties that a lender acquires as a prepared Evaluation Guidance as improvements financed by the loan will result of foreclosure. provided for in paragraph (d) of this reduce energy or water consumption by (e) Additional Activities. An section. the homeowner, the tenant, or the Enterprise may include in its Plan other (b) Evaluation areas. As provided in property by at least 15 percent, and the activities to serve very low-, low-, or § 1282.32(f), an Enterprise must specify

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in its Plan the evaluation area under skillfully an objective was implemented, site as soon as practicable after which each Plan objective will be the impact of the objective, and such providing it to the Enterprises. evaluated. FHFA will evaluate an other criteria as FHFA may set forth in (B) The proposed Evaluation Enterprise’s performance of each of its the Evaluation Guidance. Guidance will be available for public Plan objectives under one of the (3) Extra credit-eligible activities. input for a period of 120 days following following four evaluation areas, as FHFA may provide extra credit for extra its posting on FHFA’s Web site. designated by the Enterprise in its Plan: credit-eligible residential economic (C) FHFA will provide the Evaluation (1) Outreach. The extent of the diversity activities included in an Guidance to the Enterprises no later Enterprise’s outreach to qualified loan underserved market in a Plan, and for than the time FHFA provides comments sellers and other market participants in other extra credit-eligible activities to the Enterprises on their proposed each underserved market; included in an underserved market in a Plans. (2) Loan product. The Enterprise’s Plan, where such other activities are (ii) For subsequent Plans. FHFA will development of loan products, more designated by FHFA in the Evaluation provide timelines for the Evaluation flexible underwriting guidelines, and Guidance. FHFA will conduct its Guidance for subsequent Plans after the other innovative approaches to assessment of an Enterprise’s first Plan, including public input providing financing in each accomplishment of activities that are periods, 300 days before the termination underserved market; eligible for extra credit based on the date of the Plan in effect, or a later date (3) Loan purchase. The volume of method and criteria established by if additional time is necessary. loan purchases by the Enterprise in each FHFA in the Evaluation Guidance, such (4) Posting of Evaluation Guidance. underserved market relative to the as how skillfully an objective was The final Evaluation Guidance will be market opportunities available to the implemented, the impact of the posted on the Enterprises’ and FHFA’s Enterprise; and objective, and such other criteria as respective Web sites as soon as (4) Investments and grants. The FHFA may set forth in the Evaluation practicable after the Evaluation amount of the Enterprise’s investments Guidance. Guidance is finalized. and grants in projects that assist in (4) Ratings.—(i) Assignment of (5) Modification of Evaluation meeting the needs of each underserved ratings. Based on the quantitative, Guidance. From time to time, FHFA market. qualitative and extra credit assessments, may modify the Evaluation Guidance (c) Evaluation process. At the end of FHFA will assign a rating of Exceeds, prior to or during the Evaluation each evaluation year, FHFA will High Satisfactory, Low Satisfactory, Guidance’s three-year term. FHFA may evaluate each Enterprise’s performance Minimally Passing, or Fails to the seek public input on proposed under its Plan based on quantitative and Enterprise’s performance for each modifications to the Evaluation qualitative assessments of the underserved market in its Plan. A rating Guidance if FHFA determines that Enterprise’s accomplishment of the of Exceeds, High Satisfactory, Low public input would assist its objectives for the activities under each Satisfactory, or Minimally Passing will consideration of the proposed underserved market in its Plan. constitute compliance by the Enterprise modifications. Modified Evaluation Following the quantitative and with the duty to serve that underserved Guidance will be effective on January 1 qualitative assessments, FHFA may market. A rating of Fails will constitute of the year after the modified Evaluation provide extra credit for extra credit- noncompliance by the Enterprise with Guidance is posted. FHFA will post the eligible residential economic diversity the duty to serve that underserved modified Evaluation Guidance on activities in an underserved market in a market. FHFA’s Web site as soon as practicable Plan, and for other extra credit-eligible (ii) Ongoing Assessment of Evaluation after modified. activities in an underserved market in a and Rating Process. FHFA will make Plan as may be designated by FHFA in such determinations as appropriate § 1282.37 General requirements for credit. the Evaluation Guidance. based on evaluation of the program’s (a) General. FHFA will determine (1) Quantitative assessment. FHFA parameters and operation, pursuant to whether an activity included in an will conduct a quantitative assessment the Evaluation Guidance, regarding Enterprise’s Underserved Markets Plan which will evaluate the level of an implementation of the evaluation and will receive duty to serve credit or extra Enterprise’s accomplishment of each rating process. credit under an underserved market in objective for each activity in an (d) Evaluation Guidance.—(1) Three- the Plan. In this determination, FHFA underserved market in its Plan, based year term. FHFA will prepare will consider whether the activity on the level of accomplishment needed Evaluation Guidance for use by both facilitates a secondary market for for the objectives in order to receive a Enterprises for a three-year term. financing mortgages: On manufactured passing rating for compliance with the (2) Contents. The Evaluation homes for very low-, low-, and Duty to Serve an underserved market in Guidance will include the information moderate-income families; to preserve a Plan, as established by FHFA in the required under this subpart, as well as housing affordable to very low-, low-, Evaluation Guidance. At the conclusion additional guidance on Enterprise Plans, and moderate-income families; and on of the quantitative assessment for an how the quantitative and qualitative housing for very low-, low-, and underserved market in a Plan, FHFA assessments will be conducted, the role moderate-income families in rural areas. will determine whether an Enterprise of extra credit, how final ratings will be If FHFA determines that an activity will has passed or failed the required level determined, and other matters as may be receive duty to serve credit or extra of accomplishment. appropriate. credit under an underserved market in (2) Qualitative assessment. FHFA will (3) Timelines for Evaluation the Plan, the activity will receive such conduct a qualitative assessment which Guidance.—(i) For the first Plan.—(A) credit under the relevant evaluation area will evaluate the Enterprise’s FHFA will provide to the Enterprises for each underserved market it serves. accomplishment of each objective for the proposed Evaluation Guidance for (b) No credit under any evaluation each activity in an underserved market the first Plan within 30 days after the area. Enterprise activities related to the in its Plan, based on the method and posting of this subpart on FHFA’s Web following are not eligible to receive duty criteria established by FHFA in the site. FHFA will post the proposed to serve credit under any evaluation Evaluation Guidance, such as how Evaluation Guidance on FHFA’s Web area under an underserved market, even

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if the activity otherwise would receive that maintains affordability for the term underserved market in a Plan will credit under any other section of this defined by the state or local program. receive such credit in the year in which subpart, except as provided in this (2) Additional Activities. Additional the activity or objective is completed. section: Activities that either: FHFA may determine that credit is (1) Contributions to the Housing Trust (i) Involve preserving existing subsidy appropriate for an activity or objective Fund (12 U.S.C. 4568) and the Capital where the term of affordability required in which an Enterprise engages, but Magnet Fund (12 U.S.C. 4569), and for the subsidy is followed, or where does not complete, in a particular year, mortgage purchases funded with such there is a deed restriction for except that activities or objectives under grant amounts; affordability for the life of the loan; or the loan purchase evaluation area will (2) HOEPA mortgages; (ii) Involve preserving the receive credit in the year in which the (3) Subordinate liens on multifamily affordability of properties in Enterprise purchased the mortgage. properties, except for subordinate liens conjunction with state or local (g) Credit under one evaluation area. originated for energy or water efficiency inclusionary zoning, real estate tax An activity or objective will receive improvements on multifamily rental abatement, or loan programs, where a duty to serve credit under only one properties that meet the requirements in regulatory agreement, recorded use evaluation area in a particular § 1282.34(d)(2); restriction, or deed restriction maintains underserved market. (4) Subordinate liens on single-family affordability of a portion of the (h) Credit under multiple underserved properties, except for shared property’s units for the term defined by markets. An activity or objective, appreciation loans that satisfy all of the the state or local program. including financing of dwelling units by requirements in § 1282.34(d)(4) of this (d) No credit under loan purchase an Enterprise’s mortgage purchase, will part; evaluation area. The following activities receive duty to serve credit under each (5) Low-Income Housing Tax Credit are not eligible to receive duty to serve underserved market for which the equity investments in a property, except credit under the loan purchase activity or objective qualifies in that where the property is located in a rural evaluation area, even if the activity year. area; otherwise would receive duty to serve (6) Permanent construction take-out credit under § 1282.38: § 1282.38 General requirements for loan loans and Additional Activities under (1) Purchases of mortgages to the purchases. the affordable housing preservation extent they finance any dwelling units (a) General. This section applies to market, except as provided in paragraph that are secondary residences; Enterprise mortgage purchases that may (c) of this section; and (2) Single-family refinancing receive duty to serve credit under the (7) Any combination of factors in mortgages that result from conversion of loan purchase evaluation area for a paragraphs (b)(1) through (b)(6) of this balloon notes to fully amortizing notes, particular underserved market in a Plan. section. if the Enterprise already owns or has an Only dwelling units securing a mortgage (c) Credit for certain permanent interest in the balloon note at the time purchased by the Enterprise in that year construction take-out loans and conversion occurs; and not specifically excluded under Additional Activities under the (3) Purchases of mortgages or interests § 1282.37(b) and (d) may receive credit. affordable housing preservation market. in mortgages that previously received (b) Counting dwelling units. Enterprise activities related to credit under any underserved market Performance under the loan purchase permanent construction take-out loans within the five years immediately evaluation area will be measured by and Additional Activities under the preceding the current performance year; counting dwelling units affordable to affordable housing preservation market (4) Purchases of mortgages where the very low-, low-, and moderate-income are eligible for duty to serve credit, property or any units within the families. provided the following requirements are property have not been approved for (c) Credit for owner-occupied units.— met, as applicable: occupancy; (1) Mortgage purchases financing (1) Permanent construction take-out (5) Any interests in mortgages that owner-occupied single-family properties loans.—(i) The permanent construction FHFA determines will not be treated as will be evaluated based on the income take-out loans preserve existing interests in mortgages; of the mortgagor(s) and the area median subsidies on affordable housing with (6) Purchases of state and local income at the time the mortgage was regulatory periods of required government housing bonds except as originated. To determine whether affordability that are at least as provided in § 1282.39(h); and mortgages may receive duty to serve restrictive as the longest affordability (7) Any combination of factors in credit under a particular family income restriction applicable to the subsidy or paragraphs (d)(1) through (d)(6) of this level, i.e., very low-, low-, or moderate- subsidies being preserved; or section. income, the income of the mortgagor(s) (ii) The permanent construction take- (e) FHFA review of activities or is compared to the median income for out loans are for housing developed objectives. FHFA may determine the area at the time the mortgage was under state or local inclusionary zoning, whether and how any activity or originated, using the appropriate real estate tax abatement, or loan objective will receive duty to serve percentage factor provided under programs, where the property owner has credit under an underserved market in § 1282.17. agreed to restrict a portion of the units a Plan, including treatment of missing (2) Mortgage purchases financing for occupancy by very low-, low-, or data. FHFA will notify each Enterprise owner-occupied single-family properties moderate-income families, and to in writing of any determination for which the income of the restrict the rents that can be charged for regarding the treatment of any activity mortgagor(s) is not available will not those units at affordable rents to those or objective. FHFA will make any such receive duty to serve credit under the populations, or where the property is determinations available to the public loan purchase evaluation area. developed for a shared equity program on FHFA’s Web site. (d) Credit for rental units.—(1) Use of that meets the requirements under (f) The year in which an activity or rent. For Enterprise mortgage purchases § 1282.34(d)(4), and where there is a objective will receive credit. An activity financing single-family rental units and regulatory agreement, recorded use or objective that FHFA determines will multifamily rental units, affordability is restriction, or deed restriction in place receive duty to serve credit under an determined based on rent and whether

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the rent is affordable to the income estimate affordability of rental units for the resulting ratio by the total number groups targeted by the duty to serve. A purposes of receiving extra credit for of homes in the community. rent is affordable if the rent does not residential economic diversity activities. (g) Application of median income.— exceed the maximum levels as provided The estimated affordability information (1) To determine an area’s median in § 1282.19. is calculated by multiplying the number income under §§ 1282.17 through (2) Affordability of rents based on of rental units with missing affordability 1282.19 and the definitions in § 1282.1, housing program requirements. Where a information in properties securing the the area is: multifamily property is subject to an mortgages purchased by the Enterprise (i) The metropolitan area, if the affordability restriction under a housing in each census tract by the percentage property which is the subject of the program that establishes the maximum of all moderate-income rental dwelling mortgage is in a metropolitan area; and permitted income level for a tenant or units in the respective tracts, as (ii) In all other areas, the county in a prospective tenant or the maximum determined by FHFA. which the property is located, except permitted rent, the affordability of units (f) Affordability of manufactured that where the State non-metropolitan in the property may be determined housing communities. For an Enterprise median income is higher than the based on the maximum permitted purchase of a blanket loan on a county’s median income, the area is the income level or maximum permitted manufactured housing community, State non-metropolitan area. rent established under such housing unless otherwise determined by FHFA, (2) When an Enterprise cannot program for those units. If using income, the affordability of the homes in the precisely determine whether a mortgage the maximum income level must be no community shall be determined using is on dwelling unit(s) located in one greater than the maximum income level one of the methodologies in paragraphs area, the Enterprise must determine the for each income group targeted by the (f)(1) or (f)(2) of this section, as median income for the split area in the duty to serve, adjusted for family or unit applicable, except that for purposes of manner prescribed by the Federal size as provided in § 1282.17 or determining extra credit for residential Financial Institutions Examination § 1282.18, as appropriate. If using rent, economic diversity activities or Council for reporting under the Home the maximum rent level must be no objectives, the methodology in Mortgage Disclosure Act (12 U.S.C. 2801 greater than the maximum rent level for paragraph (f)(2) of this section may not et seq.), if the Enterprise can determine each income group targeted by the duty be used. that the mortgage is on dwelling unit(s) to serve, adjusted for unit size as (1) Methodology for government-, located in: provided in § 1282.19. nonprofit- or resident-owned (i) A census tract; or (3) Unoccupied units. Anticipated manufactured housing communities. (ii) A census place code. rent for unoccupied units may be the For a manufactured housing community (h) Newly available data. When an market rent for similar units in the owned by a government unit or Enterprise uses data to determine neighborhood as determined by the instrumentality, a nonprofit whether a dwelling unit may receive lender or appraiser for underwriting organization, or the residents, if laws or duty to serve credit under the loan purposes. A unit in a multifamily regulations governing the affordability purchase evaluation area and new data property that is unoccupied because it of the community, or the community’s is released after the start of a calendar is being used as a model unit or rental or ownership entity’s founding, quarter, the Enterprise need not use the office may receive duty to serve credit chartering, governing, or financing new data until the start of the following only if the Enterprise determines that documents, require that a certain quarter. the number of such units is reasonable number or percentage of the and minimal considering the size of the community’s homes be affordable § 1282.39 Special requirements for loan multifamily property. consistent with paragraph (d)(1) of this purchases. (4) Timeliness of information. In section, then any homes subject to such (a) General. Subject to FHFA’s evaluating affordability for single-family affordability restriction are treated as determination of whether an activity or rental properties, an Enterprise must use affordable. objective will receive duty to serve tenant income and area median income (2) Census tract methodology for any credit under a particular underserved available at the time the mortgage was type of manufactured housing market, the activities or objectives originated. For multifamily rental community. For any type of identified in this section will be treated properties, the Enterprise must use manufactured housing community, as mortgage purchases as described and tenant income and area median income except for purposes of determining extra receive credit under the loan purchase available at the time the mortgage was credit for residential economic diversity evaluation area. An activity or objective acquired. activities or objectives, the affordability that is covered by more than one (e) Missing data or information for of the homes in the community is paragraph below must satisfy the rental units.—(1) When calculating unit determined as follows: requirements of each such paragraph. affordability, rental units for which (i) If the median income of the census (b) Credit enhancements.—(1) bedroom data are missing will be tract in which the manufactured Dwelling units financed under a credit considered efficiencies. housing community is located is less enhancement entered into by an (2) When an Enterprise lacks than or equal to the area median Enterprise will be treated as mortgage sufficient information to determine income, then all homes in the purchases only when: whether a rental unit in a single-family community are treated as affordable; (i) The Enterprise provides a specific or multifamily property securing a (ii) If the median income of the census contractual obligation to ensure timely mortgage purchased by the Enterprise tract in which the manufactured payment of amounts due under a receives duty to serve credit under the housing community is located exceeds mortgage or mortgages financed by the loan purchase evaluation area because the area median income, then the issuance of housing bonds (such bonds rental data are not available, the number of homes that are treated as may be issued by any entity, including Enterprise’s performance with respect to affordable is determined by dividing the a State or local housing finance agency); such unit may be evaluated using area median income by the median and estimated affordability information, income of the census tract in which the (ii) The Enterprise assumes a credit except that an Enterprise may not community is located and multiplying risk in the transaction substantially

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equivalent to the risk that would have on individual dwelling units will be an Enterprise will not comply with, the been assumed by the Enterprise if it had treated as mortgage purchases. duty to serve a particular underserved securitized the mortgages financed by (f) Seasoned mortgages. An market in a given year, the Director may such bonds. Enterprise’s purchase of a seasoned require the Enterprise to submit a (2) When an Enterprise provides a mortgage will be treated as a mortgage housing plan for approval by the specific contractual obligation to ensure purchase. Director. timely payment of amounts due under (g) Purchase of refinancing mortgages. (b) Nature of housing plan. If the any mortgage originally insured by a The purchase of a refinancing mortgage Director requires a housing plan, the public purpose mortgage insurance by an Enterprise will be treated as a housing plan must: entity or fund, the Enterprise may, on a mortgage purchase only if the (1) Be feasible; case-by-case basis, seek approval from refinancing is an arms-length (2) Be sufficiently specific to enable the Director for such transactions to transaction that is borrower-driven. the Director to monitor compliance receive credit under the loan purchase (h) Mortgage revenue bonds. The periodically; evaluation area for a particular purchase or guarantee by an Enterprise (3) Describe the specific actions that underserved market. of a mortgage revenue bond issued by a the Enterprise will take: (c) Risk-sharing. Mortgages purchased state or local housing finance agency (i) To comply with the duty to serve under risk-sharing arrangements will be treated as a purchase of the a particular underserved market for the between an Enterprise and any federal underlying mortgages only to the extent next calendar year; or agency under which the Enterprise is the Enterprise has sufficient information (ii) To make such improvements and responsible for a substantial amount of to determine whether the underlying changes in its operations as are the risk will be treated as mortgage mortgages or mortgage-backed securities reasonable in the remainder of the year, purchases. serve the income groups targeted by the if the Director determines that there is (d) Participations. Participations duty to serve. a substantial probability that the purchased by an Enterprise will be (i) Seller dissolution option.—(1) Enterprise will fail to comply with the treated as mortgage purchases only Mortgages acquired through transactions duty to serve a particular underserved when the Enterprise’s participation in involving seller dissolution options will market in such year; and the mortgage is 50 percent or more. be treated as mortgage purchases only (4) Address any additional matters (e) Cooperative housing and when: relevant to the housing plan as required, condominiums.—(1) The purchase of a (i) The terms of the transaction in writing, by the Director. mortgage on a cooperative housing unit provide for a lockout period that (c) Deadline for submission. The (‘‘a share loan’’) or a mortgage on a prohibits the exercise of the dissolution Enterprise must submit the housing condominium unit will be treated as a option for at least one year from the date plan to the Director within 45 days after mortgage purchase. Such a purchase on which the transaction was entered issuance of a notice requiring the will receive duty to serve credit in the into by the Enterprise and the seller of Enterprise to submit a housing plan. same manner as a mortgage purchase of the mortgages; and The Director may extend the deadline single-family owner-occupied units, i.e., (ii) The transaction is not dissolved for submission of a housing plan, in affordability is based on the income of during the one-year minimum lockout writing and for a time certain, to the the mortgagor(s). period. extent the Director determines an (2) The purchase of a blanket (2) FHFA may grant an exception to extension is necessary. mortgage on a cooperative building or a the one-year minimum lockout period (d) Review of housing plans. The mortgage on a condominium project described in paragraphs (i)(1)(i) and Director will review and approve or will be treated as a mortgage purchase. (i)(1)(ii) of this section, in response to a disapprove housing plans in accordance The purchase of a blanket mortgage on written request from an Enterprise, if with 12 U.S.C. 4566(c)(4) and (c)(5). a cooperative building will receive duty FHFA determines that the transaction (e) Resubmission. If the Director to serve credit in the same manner as a furthers the purposes of the Enterprise’s disapproves an initial housing plan mortgage purchase of a multifamily Charter Act and the Safety and submitted by an Enterprise, the rental property, except that affordability Soundness Act. Enterprise must submit an amended must be determined based solely on the (3) For purposes of paragraph (i) of housing plan acceptable to the Director comparable market rents used in this section, ‘‘seller dissolution option’’ not later than 15 days after the underwriting the blanket loan. If the means an option for a seller of Director’s disapproval of the initial underwriting rents are not available, the mortgages to the Enterprises to dissolve housing plan. The Director may extend loan will not be treated as a mortgage or otherwise cancel a mortgage purchase the deadline if the Director determines purchase. The purchase of a mortgage agreement or loan sale. that an extension is in the public on a condominium project will receive interest. If the amended housing plan is duty to serve credit in the same manner § 1282.40 Failure to comply. not acceptable to the Director, the as a mortgage purchase of a multifamily If the Director determines that an Director may afford the Enterprise 15 rental property. Enterprise has not complied with, or days to submit a new housing plan. (3) Where an Enterprise purchases there is a substantial probability that an ■ 4. Add § 1282.66 to subpart D to read both a blanket mortgage on a Enterprise will not comply with, the as follows: cooperative building and share loans for duty to serve a particular underserved units in the same building, both the market in a given year and the Director § 1282.66 Enterprise reports on duty to mortgage on the cooperative building determines that such compliance is or serve. and the share loans will be treated as was feasible, the Director will follow the (a) First and third quarter reports. mortgage purchases. Where an procedures in 12 U.S.C. 4566(b). Each Enterprise must submit to FHFA a Enterprise purchases both a mortgage on first and third quarter report on its a condominium project and mortgages § 1282.41 Housing plans. activities and objectives under each on individual dwelling units in the (a) General. If the Director determines underserved market in its Underserved same project, both the mortgage on the that an Enterprise did not comply with, Markets Plan for the loan purchase condominium project and the mortgages or there is a substantial probability that evaluation area. The report must

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include detailed year-to-date the Freddie Mac Act and for purposes certain information from the first, information on the Enterprise’s progress of FHFA’s Annual Housing Report to second, and third quarter reports at a towards meeting the activities and Congress, each Enterprise must submit reasonable time after the end of the objectives in its Plan. The Enterprise to FHFA an annual report on all of the calendar year for which they apply, must submit the first and third quarter activities and objectives under each with any confidential and proprietary reports to FHFA within 60 days of the underserved market in its Underserved information and data omitted. FHFA end of the respective quarter. Markets Plan no later than 75 days after will make public certain information (b) Second quarter report. Each the end of each calendar year. For each from the annual reports at a reasonable Enterprise must submit to FHFA a underserved market, the Enterprise’s time after receiving them from the second quarter report on all of the annual report must include, at a Enterprises, with any confidential and activities and objectives under each minimum: A description of the proprietary information and data underserved market in its Underserved Enterprise’s market opportunities for omitted. In the third year of the Markets Plan. The report must include loan purchases during the evaluation Underserved Markets Plans, FHFA will detailed year-to-date information on the year to the extent data is available; the make public certain narrative Enterprise’s progress towards meeting volume of qualifying loans purchased information from the year’s second the activities and objectives under each by the Enterprise during the evaluation quarter report, excluding data under the underserved market in its Plan, and year; a comparison of the Enterprise’s loan purchase evaluation area and any contain narrative and summary loan purchases with its loan purchases confidential and proprietary statistical information for the Plan in prior years; a comparison of market information and data, at a reasonable objectives, supported by appropriate opportunities with the size of the time after receiving it within the transaction level detail. The Enterprise relevant markets in the past, to the calendar year. must submit the second quarter report extent data is available; and narrative Dated: December 12, 2016. to FHFA within 60 days of the end of and summary statistical information for Melvin L. Watt, the second quarter. the Plan objectives, supported by (c) Annual report. To comply with the appropriate transaction level data. Director, Federal Housing Finance Agency. requirements in sections 309(n) of the (d) Public disclosure of information [FR Doc. 2016–30284 Filed 12–28–16; 8:45 am] Fannie Mae Charter Act and 307(f) of from reports. FHFA will make public BILLING CODE 8070–01–P

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