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HUD   >   Program Offices   >   General Counsel   >   Frequently Asked Questions   >   Closing Guide
Multifamily Document Reform Implementation Frequently Asked Questions

Closing Guide

(If you have a question related to this document, please submit it to MultifamilyDocumentReview@hud.gov.)

 

  1. The new Closing Guide seems to say, that for a corporate borrower, the required HUD language may be placed in the by-laws rather than the articles. If this correct?
  1. Is the intent that the organizational language go in the by-laws for a corporate borrower rather than the articles? It's a change from the way we have handled it.
  1. Does the checklist require organizational documents to include HUD required provisions? The checklists indicate that the operating agreement/partnership agreement/bylaws of the managing member/general partner should include the HUD required provisions which we have not required in the past. Anticipating resistance, can you please provide the authority and rationale for this requirement? Specifically, we are concerned because these entities could be managing members in other non-HUD deals. 
  1. What is the prescribed form for #53 (the Closing Certification) on the Initial Closing Checklist for Section 207, 220 and 221 Projects? I'd note that this "Closing Certification" is not required in the 223(f), the 223(a)(7), the final closing closing checklist or the insurance upon completion checklists. Was this intentional? Additionally, who is the closing certification to be from and who is it to be addressed to?
  1. The closing guide checklists require that the org docs for the managing member/general partner of the borrower include the HUD required provisions. Is this a typo? Requiring that the HUD provisions be included in not only the borrower's org docs but also the org docs of the managing member/general partner would be a change in practice. It would not be consistent with our requirements for a 232. The rest of the Closing Guide and the provisions themselves do not seem to contemplate that the provisions be included in any documents other than the borrower's own org docs. This leads me to think that this is a typo in the checklist, but I want to be sure.
  1. I do not think the financing statements are listed in the 223f checklist and probably should be added if they are not there. Is this correct?
  1. Which Comprehensive Endorsement are we supposed to get? The closing guide leaves that question open. It appears that the 9.3-06 provides a bit of additional coverage for improvements that are constructed after the date of the policy. Is such coverage preferred in a refinance?
     
  1. On the new checklists the item for the Title Insurance Policy, with endorsements, references the title commitment along with the exception documents and pro forma policy under status and comments. Does this mean the title commitment should be submitted to HUD for review with the closing package? If so this seems to contradict the language in Section 1.2(D)1(a) and (b) found on page 4 of the closing guide. If it is submitted are there specific standards that HUD will be reviewing in the title commitment?
  1. The Closing Guide now asks for a closing protection or insured closing letter that indicates that the agent has the authority to issue the policy (3.2.B.7). The title company submitted what appears to be a form Closing Protection Letter, but it does not seem to have that authority language. Is there a particular form of this letter that we should be looking for, or is it more likely that we will get a personalized letter that simply includes that language?
  1. The checklists for 223(f)s and 223(a)(7)s list an estoppel letter/lender's current payment letter. The only reference to these forms in the guide itself (that I can find) is at 2.10(l), under final closing documents, and it seems that the estoppel letter is geared more toward a certification for events that might have occurred during construction rather than toward a refinance transaction. We always collected a current payment letter from the lender for the original loan, but do we also need to collect this estoppel letter from them? If so, would they need to provide the confirmations regarding permits as outlined in the closing guide, or are we concerned in a refinance with whether or not there has been an event of default? Can you provide an example of this letter?
  1. Section 5.5 #2(b) of the Closing Guide indicates builder's risk insurance for offsite must be submitted to HUD. However, Section 3.7 provides HUD does not review or collect the insurance policies. Does this mean we no longer collect builder's risk insurance in new construction projects?
  1. The 223f closing checklist in the closing guide lists a "certificate of no change to survey." In what instances would that be used? Do we not need a survey within 120 days?

  1. Is the construction progress schedule no longer required? It is not listed in the closing checklist although it is mentioned in the closing guide (1.2.A.4).

  1. The 223f checklist in the closing guide calls for "HUD Representative's Trip Report (HUD-95379). Is this a new requirement? I have only seen the Trip reports in d4 finals.

  1. The Closing Guide requires that the certificate of the borrower be made or witnessed by someone other than the party designated to execute the loan documents. In the transaction on which I am working, the borrower entity is a limited partnership, which is made up of a general partner (a corporation) and a limited partner (a trust). However, the general partner entity is a corporation and the board member, officer and sole shareholder are all the same individual. This individual is contemplated to sign the officer's certificate. Who should witness the certificate, if anyone? Or should we, in this case, allow the individual as the officer of the general partner corporation sign the certificate and forego the witness? I am inclined to allow the individual to sign the documents without a witness, but I wanted to verify that there was not another preference from a policy standpoint.
  1. Please confirm whether the Regulatory Agreement may be described as "affected by" instead of "as incorporated by" on Schedule A, and listed on both Schedule A and B1 under the new Closing Guide?

  1. The closing guide states that the Restrictive Covenants Rider should be "incorporated into any recorded document containing restrictive covenants." Is this still true if the document is already subject to the Subordination Agreement? For instance, state housing agencies require regulatory agreements, which often include restrictive covenants such as ongoing affordability requirements. This state regulatory agreement is already subordinated by the new Subordination Agreement. Do we also have to attach the Restrictive Covenants Rider?

  1. (2/29/2012)
    With respect to the section on Escrow for Off-site Facilities, we find the HUD-92300 and 92606.  We do not find the old escrow form anywhere.  Are we missing something?  Appendix 11 of the MAP Guide lists the Financial Requirements for Closing, FHA-2283.  We have used this for years in our closings.  We cannot find it anywhere.  Any suggestions?  
  1.  (4/24/2012)
    I am working on a series of (d)(4) initial closings and have a question about title policy endorsements. Section 3.2C of the new Closing Guide lists the endorsements required for HUD-insured closings and includes the following: Construction Loan Pending Disbursement, ALTA Endorsement Form 32-06, if applicable; Future Advances, ALTA Endorsement Form 14-06, if applicable. After reading through these two forms, it seems like there's a good deal of overlap, in terms of the coverage provided. In the context of a (d)(4) initial closing, should we be collecting the 32-06, the 14-06, or both?
  1. (4/14/2012)
    The closing guide at 2.1.A.5 [EDITORIAL NOTE:  this should be 2.3.A.5]states that the address for notice to HUD in the Security Instrument and in the UCC-1 Financing Statements "shall be the Office of Housing in the local HUD Field Office." Lender's counsel completed the Financing Statement with the field office address as the mailing address shown in 12c of the form. In 12a Lender's Counsel listed the Additional Secured Party as "Secretary of Housing and Urban Development of Washington, D.C., their successors and assigns as their interests may appear." Lender's counsel says that other field offices require this language in 12a of the Financing Statement. Does the closing guide contemplate that 12a of the Financing Statement will list the Office of Multifamily Housing for the field office or should the Financing Statement list the Secretary of Housing and Urban Development of Washington, D.C. etc. as indicated by Lender's counsel?
  1. (4/16/2012)
    I am working on a series of (d)(4) initial closings and have a question about title policy endorsements. Section 3.2C of the new Closing Guide lists the endorsements required for HUD-insured closings and includes the following: Construction Loan Pending Disbursement, ALTA Endorsement Form 32-06, if applicable; Future Advances, ALTA Endorsement Form 14-06, if applicable. After reading through these two forms, it seems like there's a good deal of overlap, in terms of the coverage provided. In the context of a (d)(4) initial closing, should we be collecting the 32-06, the 14-06, or both?
  1.  (7/03/2012)
    There appears to be a mild discrepancy in the Closing Guide between Sections 3.8(D) and Section 5.3 in guidance relating to the rider for restrictive covenants. If we have restrictive covenants that impose rent restrictions/affordability requirements, and the parties are using the language from the HUD Rider, do we need to add language to incorporate Paragraphs 1 and 2 of Section 3.8(D) of the Closing Guide, or is the Rider, by itself, sufficient?
  1.  (7/25/2012)
    There appears to be an error in Part 5 of the Closing Guide. Namely, paragraph 11 of Section 5.2 should state, in relevant part: "...for so long as the Project is subject to a loan insured or held by HUD, any obligation of the [Corporation]...."
  1. (11/16/2012)
    From what I understand, the ALTA Title Policy Endorsement forms were revised in April 2012 and, as a result, our guidance on title policies is both outdated and incorrect. If you look at the revised versions of the forms, the April 2012 version of ALTA 9.3-06 has been revised to remove coverage for encroachments, minerals, and private rights. ALTA 9-06 has been watered down to remove coverage for private rights.

    Currently, our guidance indicates we should try to use 9.3-06 or, in the alternative, 9-06. For the reasons outlined above, we probably shouldn't be relying solely on these endorsements because they provide less coverage than what we were receiving pre-April 2012.

    As a result, for all closing going forward, we should be getting both ALTA 9-06 and ALTA 9.6-06. We SHOULD NOT
    be receiving just 9.3-06 because it lacks the coverage we have traditionally wanted. In the event someone
    provides you with 9.3-06, you should still be getting 9-06 and 9.6-06.

  1.  (11/25/2012)
    I have a general question about the endorsements for the title policy. The closing guide states that we should get either Form 3.1-06 based on plans and specifications (for unimproved land) or Form 3.1-06 (for improved land and upon final closing) each with parking. It appears that the 3.1-06 is for improved land, but for unimproved land there appears to be the option for either the 3-06 or the 3.2-06. The 3.2-06 seems to be more comprehensive because it provides coverage for violations of specific items (such as floor space and setbacks). Should the closing guide reference be to the 3.2-06?
  1. (12/19/2012)
    On the Secondary Financing Rider (5.1), I suggest replacing "Junior Mortgage" with "Junior Loan" in paragraphs 8 and 9 as being more accurate, especially if the note is unsecured and there is no mortgage.
  1.  (2/06/2013)
    Why was the duration of the ownership entity requirement of ten years beyond the term of the FHA-insured mortgage (old MAP Guide Chapter 12.1.4.F) dropped from the Closing Guide, 5.2?
  1.   (2/07/2013)
    Section 3.2.D.4 of the Multifamily Program Closing Guide requires that the Surveyor's Report (and presumably the ALTA Survey) must be signed "by a licensed surveyor, not by an engineer, and bearing the surveyor's original signature and professional seal." The requirement for a "licensed surveyor" is also conveyed in Section 12.13 of the MAP Guide. Does this requirement also apply to jurisdictions that permit civil engineers who are not licensed surveyors to practice land surveying under state law, or does the less restrictive state standard prevail? For instance, the state of California exempts civil engineers registered prior to January 1, 1982 from its licensing standards and permits them to "engage in the practice of land surveying with the same rights and privileges, and the same duties and responsibilities of a licensed land surveyor" (see Section 8731 of the CA Business and Professions Code, otherwise known as the "2013 Professional Land Surveyors' Act"). Such surveys conform to state law requirement and bear the seal of a "Registered Professional Engineer."
  1. (8/15/2013)
    Here are two minor typographical errors that need to be corrected in the Closing Guide and 221(d)(4) checklist: In the 2013 Closing Guide, 5.2 HUD Required Provisions, paragraph 11; the second (ii) should be changed to (iii); in the 221(d)(4) Initial Closing Checklist, item 39: The Completion Assurance Documents for Offsite Improvements section in the Closing Section is 3.5(D), not 3.5(E).
  1. (8/21/2013)
    Closing Guide 2.3(5) [should be 2.3.A.5] states: "HUD shall be listed as an additional secured party, as follows: 'Secretary of Housing and Urban Development of Washington, D.C., their successors and assigns as their interests may appear,' and the address shall be the Office of Housing in the local HUD Field Office." We believe this statement is inaccurate in a few respects. First, if there is a successor to HUD, the successor, by application of law, may already succeed to the powers HUD has under the financing statement. Second, if there is an assign of HUD, we would be required to file a UCC-3 Amendment showing the actual assignment to the new party. Third, we do not believe there is a Secretary of Housing and Urban Development of "Washington, D.C." but rather, a "United States" Secretary of Housing and Urban Development.

    1. The Official Comment to Section 9-511 "Secured Party of Record" in the Uniform Commercial Code states that application of law may result in a person succeeding to the powers of a secured party of record (i.e. mergers of corporations), in which case, the successor is authorized to take all actions that the original Secured Party would be authorized to take. The comment goes on to state that "acts taken by a person who is authorized under generally applicable principles of agency to act on behalf of the secured party of record are effective." Given the above, is it necessary to add "their successors" to HUD's name in the UCC financing statements?

    2. Section 9-514 "Assignment of Powers of Secured Party of Record" states that a secured party may assign its power to authorize an amendment to the financing statement by filing an amendment to the financing statement identifying the original financing statement file number and providing the name of the assignor and name/address of the assignee. The comment section goes on to state that if an assignment is not filed, the assignor remains the secured party of record. Therefore, adding "and assigns" after HUD's name in the original financing statement will not effectuate an assignee's rights unless an actual UCC Amendment is filed. Therefore, we do not believe adding "and assigns" to HUD's name in the UCC financing statements will be effective.

    3. Section 9-502(a)(2) of the Uniform Commercial Code states that for a financing statement to be sufficient it must, among other things, provide the name of the secured party or a representative of the secured party. Is there a Secretary of Housing & Urban Development for Washington, D.C. specifically? Should this simply read the "United States Secretary of Housing & Urban Development?"

    In sum, we do not believe adding "successors and assigns as their interests may appear" to HUD's name in the UCC block for "additional secured party" is necessary or effective, and we believe HUD's name as "additional secured party" should be reflected as the "United States Secretary of Housing and Urban Development." If you could please advise as to these three items, we would be very appreciative. Thank you for your help.

 

  1. (11/06/2013)
    I am doing my first final closing review with the new MF documents (and FHA Closing Guide) and have a few observations/questions about the checklist:

    (1) The checklist presents some ambiguity as to whether an Opinion of Borrower's Counsel is always required at final closing. Is it safe to assume that the intent is only to require an opinion if there is a mortgage increase (per past practice, and as discussed in Section 2.10.E of the FHA Closing Guide)? If so, I suggest adding an "If applicable" note in the Status and Comment Section. Same comment regarding checklist items 7, 9, 10 and 11.

    (2) As a general note, the checklist might be more intuitive if it had two sections dealing with "Mortgage Increase"and "Mortgage Decrease" requirements.

    (3) There does not seem to be a checklist item for post-initial closing Secondary Financing and/or Supplemental Bond/LIHTC Deliverables (or should this be considered a Special Condition?). In certain jurisdictions, like California, Borrowers don't qualify to utilize tax deductions associated with LIHTC financing until project improvements have been completed, so these will be items that are collected at final, rather than initial,
    closing. On a related note, and assuming that we will only collect an Opinion of Borrower's Counsel for mortgage increases, I suggest listing the Bond/LIHTC opinions as a separate checklist item (perhaps as part of a "Supplemental Bond/LIHTC Deliverables" section?), rather than as a subcategory of the Opinion of Borrower's Counsel.

    (4) Also, with regard to Bond/LIHTC deliverables that are not provided until final closing, is the expectation that we are to collect a supplemental Opinion of Borrower's Counsel that addresses Sections 3.8.F and 3.9.B of the FHA Closing Guide (or is the Lender's Opinion sufficient)?

  1. (11/06/2013)
    The Closing Guide at 3.2.B.4 (page 53) requires that the title policy show "no other monetary liens," except approved secondary financing and other liens as may be shown as subordinate to the lien of the insured loan. The Guide provides that "Real estate taxes shall be shown as not yet due and payable; all due and payable taxes shall be paid prior to or at closing." One national title insurer insists that it cannot delete an exception on the title policy for municipal water and sewer charges. The title insurer, when pressed, will show the water and sewer charges as "not delinquent" but refuses to show the charges as "not yet due and payable" or to delete the exception from the policy. The title insurer states that "as soon as you turn on a water faucet at the property, the water bill is payable." Other title insurers delete the water and sewer charges for the same municipality without difficulty. Is it acceptable for water and sewer charges to be shown as an exception on the title policy with the note "not delinquent" rather than "not yet due and payable?"

  1. (2/26/2014)
  1. (7/2/2014)
    Section 1.15.2 of the Closing Guide requires: "Sufficient funds from the final advance of mortgage loan proceeds shall be placed in escrow with Lender or an escrow agent approved by HUD. Such funds are to be released from escrow only upon Lender or escrow agent being furnished with simultaneous acknowledgment of payment by the general contractor and/or appropriate subcontractor or materialmen." Our office has a final closing in which there is just shy of $600,000 in unpaid sums owed to sub-contractors, and the parties are requesting that rather than escrow the funds, the funds be disbursed to the borrower who will pay the general contractor who in turn will pay the subs. The project was completed in September of last year (two items of delayed completion were approved this spring/summer). Borrower’s counsel has copies of lien waivers from the general and all of the subs and should be providing them shortly. He’s also pursuing the possibility of having the general provide at closing copies of the checks that will be given to the subs post-closing. The title policy will show the insured loan in first position and no liens from the subs. Local Housing staff indicated they are comfortable with the arrangement because the general contractor has paid all other amounts to this point.
    Lender’s and Borrower’s counsel have pointed to the Request for Final Endorsement as permitting this arrangement. In that document, the Certificate of General Contractor requires the general to disclose any unpaid amounts and then states: "That, except for unfinished work covered by an approved escrow deposit, the undersigned agrees to pay the foregoing obligations in cash, within 15 days following receipt of payment from Borrower." This form clearly seems to anticipate that the general would in fact be the party who would disburse payments to the subs and appears to be in conflict with the policy guidance.
    Borrower’s counsel has also pointed out that the privity of contract from the subs is with the general contractor, so any potential litigation would likely be against the general. It also appears that the mortgage was recorded before any construction was begun, so any liens that might still be permitted from the subs should be subordinate to the insured loan. Finally, the borrower is disclosing that it owes sums to the general, and that sum covers the amounts owed to the subs. If the waiver is not granted, then the parties are speaking with the title company to see if they would function as the escrow agent.
  1. (7/2/2014)
    Section 3.8 of the Closing Guide discusses Bond Counsel Opinions. Here are a few ambiguities that should be cleared up in the next version of the Closing Guide: 1) Does the Bond Counsel Opinion need to include HUD as a party who may rely upon the opinion? Opinions are commonly made for the reliance of the Borrower, the entity issuing the Bonds, and the Bond Trustee. 2) Can you please clarify what requirements apply to other varieties of bonds, such as Industrial Development Authority ("IDA") bonds? The Closing Guide discusses Tax Exempt Bonds, but I don’t think Industrial IDA-type bonds are being considered by that guidance. IDA bonds are commonly used as a way to reduce sales or property taxes at a project site. Unlike Tax Exempt Bonds, IDA bonds may or may not require restrictive covenants.

    As written, the guidance in the Closing Guide and the MAP Guide appear to be inapplicable to IDA bond transactions. For example, since there were not any restrictive covenants relating to the bonds which would encumber the land, I did not collect a Lender’s Attorney’s Opinion at initial closing because the information requested by HUD’s guidance appear to be inapplicable.

  1. (7/21/2014)
    How should the Certificate of Architectural/Engineering Fees be completed?  Is it signed by the borrower, or the architect, or both?  I was asking for the architect to show the design fee, list the amount, and show a $0 balance.  Others are having the document signed by the borrower and writing none across all blanks (name of firm, service provided, fee, and balance).  Should the design fee be shown?  Should the supervision fee be shown?

  1. (08/07/2014)
    Section 3.2(C) of the Closing Guide requires an endorsement to the title policy regarding air rights, if applicable.  Is there an ALTA form that is contemplated for such air rights endorsement?  If not, what substantive matters should such an endorsement address?

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  1. (03/5/2015)
    The counsel for a tax credit investor limited partner has asked for a clarification to Appendix 5.2 to the October 2014 MAP Closing Guide, the HUD provisions for the Borrower's organization documents, as summarized below. Appendix 5.2 of the October 2014 MAP Closing Guide requires the borrower's organization documents contain the following provision: "8[12]. The key principals of the Borrower identified in the Regulatory Agreement are liable in their individual capacities to HUD to the extent set forth in the Regulatory Agreement." However, there is not a definition of "key principals" in the body of the Regulatory Agreement and since it is not capitalized in the Appendix it is not a defined term. I understand that this phrase is meant to identify the "Section 50 party or parties" and these are the same parties identified in Section 50 Addendum of the Regulatory Agreement, Section 8 of the Note and Section 6 of the Mortgage. Most of the firm commitments I have received use the term "Authorized Signer of Section 50 of the Regulatory Agreement." The term also appears in Chapter 8 of the MAP Guide but is not a defined term. I can only find that the phrase appears once in the MAP closing guide and that is in the Appendix. Would it be acceptable to amend the language of Appendix 5.2 as follows: "The key principals of the Borrower, the key principals being those individuals/entities identified in Section 50 of the Regulatory Agreement are liable in their individual capacities to HUD to the extent set forth in the Regulatory Agreement."
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1.  There are many certifications that were required on the old checklists; i.e., EEOC, Title VI & Byrd Amendments, that are no longer listed on the checklists. Are these still required? Should they be added back into the checklists?

Some of these certifications will be collected as part of the Application Process under the new MAP Guide: In Appendix 4A(III) of the new MAP Guide the application for new construction/sub rehab requires submission of the Byrd Amendment certificates, the EEOC certificate and the LIHTC certificate. The Borrower's Oath and Title VI certificate, however, are not on the application submission list, but are required for closing. In Appendix 4B of the new MAP Guide for 223(f) projects the application must include the Byrd Amendment certificates and LIHTC certificate, but not the EEOC certificate, the Title VI certificate, and the Borrower's Oath although these certifications are still required for closing. There is not a detailed application list for (a)(7) projects in the new MAP Guide, but all of these certifications (the Byrd Amendments, EEOC certificate, Title VI certificate, LIHTC certificate and Borrower's Oath) are required for closing. For projects closing under the "old" MAP Guide, these certificates are all required and the checklists were used to document collection of these required forms. It is likely that future revisions to the MAP Guide will require collection of these documents as part of the application process and so may not be required to be submitted a second time at the closing time. For now, however, they should be collected at all closings and, therefore, added back into the checklists.

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2.  The new Closing Guide seems to say, that for a corporate borrower, the required HUD language may be placed in the by-laws rather than the articles. If this correct?

Yes. The HUD required language is only required in the unfiled governing documents, such as a partnership agreement, operating agreement or bylaws.
The language in the old MAP Guide contained conflicting guidance. Paragraph F (1) of Chapter 12 provided that the “operating or partnership agreements, Limited Liability Corporation documents, or articles of incorporation for the mortgagor entity must include provisions stating that ….” It wasn’t clear whether the HUD provisions were required in the filed formation documents, the unfiled governing documents or both.
Modern practice is to permit limited information in the filed documents and accept required language in the unfiled organizational documents.
The word “formation” in the Closing Guide was a typo and should read “governing”. The typo will be corrected in the next revision of the closing guide.
Closing Guide Section 5.2:
5.2 HUD-Required Provisions for Borrower’s Organizational Documents
"The Borrower entity’s organizational governing document (partnership agreement, operating agreement, or by-laws, as applicable) must include provisions stating as follows, which provisions may automatically terminate when the loan no longer is insured or held by HUD:"

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3.  Is the intent that the organizational language go in the by-laws for a corporate borrower rather than the articles? It's a change from the way we have handled it?

Yes. The HUD required language is only required in the unfiled governing documents, such as a partnership agreement, operating agreement or bylaws.
The language in the old MAP Guide contained conflicting guidance. Paragraph F (1) of Chapter 12 provided that the “operating or partnership agreements, Limited Liability Corporation documents, or articles of incorporation for the mortgagor entity must include provisions stating that ….” It wasn’t clear whether the HUD provisions were required in the filed formation documents, the unfiled governing documents or both.
Modern practice is to permit limited information in the filed documents and accept required language in the unfiled organizational documents.
The word “formation” in the Closing Guide was a typo and should read “governing”. The typo will be corrected in the next revision of the closing guide.
Closing Guide Section 5.2:
5.2 HUD-Required Provisions for Borrower’s Organizational Documents
"The Borrower entity’s organizational governing document (partnership agreement, operating agreement, or by-laws, as applicable) must include provisions stating as follows, which provisions may automatically terminate when the loan no longer is insured or held by HUD:"

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4.  Does the checklist require organizational documents to include HUD required provisions? The checklists indicate that the operating agreement/partnership agreement/bylaws of the managing member/general partner should include the HUD required provisions which we have not required in the past. Anticipating resistance, can you please provide the authority and rationale for this requirement? Specifically, we are concerned because these entities could be managing members in other non-HUD deals.

No. Section 5.2 of the Closing Guide provides that the HUD required provisions for organizational documents are only applicable to the borrower entity and not its managing member or general partner. The “Should include HUD-required provisions” language in the checklists in the managing member/general partner "Status and Comment" section is a typo and will be deleted.

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5. What is the prescribed form for #53 (the Closing Certification) on the Initial Closing Checklist for Section 207, 220 and 221 Projects? I'd note that this "Closing Certification" is not required in the 223(f), the 223(a)(7), the final closing closing checklist or the insurance upon completion checklists. Was this intentional? Additionally, who is the closing certification to be from and who is it to be addressed to?

The "Closing Certification" is also referred to in some offices as an "Administrative Memo" or a "Clearance to Close." This form was a certification by the program staff that all closing requirements had been met. The listing of the "Closing Certification" on the Initial Closing Checklist (at #50) is duplicative of the listing of the Administrative Memo (at #47), so the Closing Certification will be removed from the Initial Closing Checklist. In addition, this requirement was not meant to alter established closing protocols. It has become clear that these forms were not used uniformly throughout the country. For the time being, if your office uses such a certification in order to facilitate the closing process between OGC and the program staff, feel free to continue to use it; if your office protocol does not require such a certification, you do not need to begin using one now. We will discuss this issue on future Multifamily calls.

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6. The closing guide checklists require that the org docs for the managing member/general partner of the borrower include the HUD required provisions. Is this a typo? Requiring that the HUD provisions be included in not only the borrower's org docs but also the org docs of the managing member/general partner would be a change in practice. It would not be consistent with our requirements for a 232. The rest of the Closing Guide and the provisions themselves do not seem to contemplate that the provisions be included in any documents other than the borrower's own org docs. This leads me to think that this is a typo in the checklist, but I want to be sure.

No. Section 5.2 of the Closing Guide provides that the HUD required provisions for organizational documents are only applicable to the borrower entity and not its managing member or general partner. The “Should include HUD-required provisions” language in the checklists in the managing member/general partner "Status and Comment" section is a typo and will be deleted.

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7. I do not think the financing statements are listed in the 223f checklist and probably should be added if they are not there. Is this correct?

Yes, UCC financing statements should have been included on the 223(f) checklist and are being added in the current revisions. New checklists will be circulated shortly.

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8. Which Comprehensive Endorsement are we supposed to get? The closing guide leaves that question open. It appears that the 9.3-06 provides a bit of additional coverage for improvements that are constructed after the date of the policy. Is such coverage preferred in a refinance?
 

 The preceding guidance is superceded by the Q&A issued on 11/16/12 (#25 in Closing Guide category on www.hud.gov), concerning the Comprehensive Endorsement.

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9. On the new checklists the item for the Title Insurance Policy, with endorsements, references the title commitment along with the exception documents and pro forma policy under status and comments. Does this mean the title commitment should be submitted to HUD for review with the closing package? If so this seems to contradict the language in Section 1.2(D)1(a) and (b) found on page 4 of the closing guide. If it is submitted are there specific standards that HUD will be reviewing in the title commitment?

No. Pursuant to the referenced sections of the closing guide, a pro forma (specimen) policy is required. The closing checklists are still subject to amendment.

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10. The Closing Guide now asks for a closing protection or insured closing letter that indicates that the agent has the authority to issue the policy (3.2.B.7). The title company submitted what appears to be a form Closing Protection Letter, but it does not seem to have that authority language. Is there a particular form of this letter that we should be looking for, or is it more likely that we will get a personalized letter that simply includes that language?

Section 3.2.B (7) of the Closing Guide requires evidence of authorization to issue the title policy if the national title company is not directly issuing the policy. Evidence may consist of an ALTA “closing protection letter” also known as an “insured closing letter” (“CPL”) issued to Lender and HUD. A CPL covers against losses resulting from enumerated acts or omissions of the issuing agent who is authorized to issue the title insurance for the national title company or an approved attorney upon whose certification of title the national title company issues title insurance.
Check the local law in each jurisdiction as some states do not permit agents or attorneys to provide title policies, some states allow agents to issue title policies, some states permit independent closers (not employees of the agent) to deliver title policies at closings, and some states restrict or prohibit the use of CPLs.
If an agent is utilized and a CPL is prohibited or restricted, evidence of authorization may consist of a simple letter from the national title company authorizing the agent. In the event your jurisdiction permits the agent to utilize an independent title closer, field counsel should collect a CPL and a separate authorization covering the independent title closer.

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11. The checklists for 223(f)s and 223(a)(7)s list an estoppel letter/lender's current payment letter. The only reference to these forms in the guide itself (that I can find) is at 2.10(l), under final closing documents, and it seems that the estoppel letter is geared more toward a certification for events that might have occurred during construction rather than toward a refinance transaction. We always collected a current payment letter from the lender for the original loan, but do we also need to collect this estoppel letter from them? If so, would they need to provide the confirmations regarding permits as outlined in the closing guide, or are we concerned in a refinance with whether or not there has been an event of default? Can you provide an example of this letter?

No, the estoppel letter is not required for 223(f) or a 223(a)(7) transactions. The closing checklists will be revised. An estoppel letter (or, a “loan is current” letter) is not required for a refinance because the new loan is current on the day it is made, and the old loan is being fully repaid. In a 223(a)(7) transaction, the loan must be current in order for the loan to be eligible for a refinancing but that fact may be confirmed by the mortgage credit office through its review of the payoff and settlement statements. Many lenders are reluctant to provide "loan is current" letters for borrowers who are about to refinance with a new lender.

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12. Section 5.5 #2(b) of the Closing Guide indicates builder's risk insurance for offsite must be submitted to HUD. However, Section 3.7 provides HUD does not review or collect the insurance policies. Does this mean we no longer collect builder's risk insurance in new construction projects?

Both permanent insurance and builder’s risk are required by the Property Insurance Requirements form, HUD-92447. In both cases it places the responsibility of ensuring continuing insurance coverage on the mortgagee. HUD does not require collection of evidence of builder’s risk coverage at initial closing, nor permanent insurance at final closing. With respect to insurance for materials stored off-site, language in the MAP Guide, Appendix 12C is the same as the language in the Closing Guide 5.5 2.b. This paragraph gives suggested language to be added to the construction contract if the builder expects to be paid for materials stored off-site. It does not require Field Counsel to collect this policy at closing, a policy the builder is unlikely to have at that time. The MAP Guide and construction contract language requires evidence of this coverage to be presented to HUD Housing, prior to advancing payment.

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13. The 223f closing checklist in the closing guide lists a "certificate of no change to survey." In what instances would that be used? Do we not need a survey within 120 days?

For 223f projects, an "as built" survey is required which should be dated within 120 days of closing. The Checklist will be revised accordingly. Certificates of no change are collected in connection with 223(a)(7)'s as explicitly stated in the closing guide.

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14. Is the construction progress schedule no longer required? It is not listed in the closing checklist although it is mentioned in the closing guide (1.2.A.4).

A construction progress schedule is required by MAP Guide 5.7.B as well as the A201. However, the construction schedule needs to be vetted by Housing program staff prior to closing, and monitored after initial closing, as set forth in the MAP Guide. Therefore, the schedule is not necessarily a document that needs to be collected at initial closing.

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15. The 223f checklist in the closing guide calls for "HUD Representative's Trip Report (HUD-95379). Is this a new requirement? I have only seen the Trip reports in d4 finals.

A trip report is written each time a HUD inspector visits any job for repairs,new construction or rehab.

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16. The Closing Guide requires that the certificate of the borrower be made or witnessed by someone other than the party designated to execute the loan documents. In the transaction on which I am working, the borrower entity is a limited partnership, which is made up of a general partner (a corporation) and a limited partner (a trust). However, the general partner entity is a corporation and the board member, officer and sole shareholder are all the same individual. This individual is contemplated to sign the officer's certificate. Who should witness the certificate, if anyone? Or should we, in this case, allow the individual as the officer of the general partner corporation sign the certificate and forego the witness? I am inclined to allow the individual to sign the documents without a witness, but I wanted to verify that there was not another preference from a policy standpoint.

We assume that your question deals with Section 3.1(A)(1) of the closing guide which states that the following document is required in connection with the borrower entity’s organizational documents: “A certificate signed by the secretary (or other appropriate officer or designee of the Borrower): (a) indicating that the organizational documents attached to the certificate (which documents are listed below) are true and correct copies and have not been amended, modified, rescinded, or revoked and remain in full force and effect, and (b) including the incumbency (office and term) of the borrower’s officers and key principals and signature of any officer authorized to execute the loan documents, provided that the certificate shall be made or witnessed by someone other than the party designated to execute the loan documents.”
Generally, the closing guide requires that another officer of the general partner corporation sign the certificate in question. However, in your case, it appears that there are no other officers of the corporation and there is no other officer to verify the specimen signatures/identity of the officer signing the certificate.
In your case, since there is no other officer of the corporation to witness the secretary's signature, then unless applicable state law requires differently, policy-wise, your approach is fine.
 

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17. Please confirm whether the Regulatory Agreement may be described as "affected by" instead of "as incorporated by" on Schedule A, and listed on both Schedule A and B1 under the new Closing Guide?

Yes, The regulatory agreement may be described as "affected by" on Schedule A of the title policy. The regulatory agreement should only be listed in Schedule A of the title policy and should not be listed is Schedule B1.

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18. The closing guide states that the Restrictive Covenants Rider should be "incorporated into any recorded document containing restrictive covenants." Is this still true if the document is already subject to the Subordination Agreement? For instance, state housing agencies require regulatory agreements, which often include restrictive covenants such as ongoing affordability requirements. This state regulatory agreement is already subordinated by the new Subordination Agreement. Do we also have to attach the Restrictive Covenants Rider?

Yes, the Rider to Restrictive Covenants must be attached to Regulatory Agreements or other use restrictions entered into in connection with a loan whose lender has executed a Subordination Agreement. Although the Subordination Agreement subordinates the subordinate lender’s rights to HUD’s rights and limits the subordinate lender’s rights to exercise its remedies under its subordinate loan documents, the Rider to Restrictive Covenants is necessary to extinguish the Restrictive Covenants upon foreclosure.

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19. (2/29/2012)
With respect to the section on Escrow for Off-site Facilities, we find the HUD-92300 and 92606.  We do not find the old escrow form anywhere.  Are we missing something?  Appendix 11 of the MAP Guide lists the Financial Requirements for Closing, FHA-2283.  We have used this for years in our closings.  We cannot find it anywhere.  Any suggestions? 

The HUD-92300 and 92606 are not Multifamily Housing forms.  Form FHA-2446, Escrow Agreement for Off-site Facilities, should be used.  The Office of General is currently updating this document to make it consistent with the other recently revised escrow agreements.  The revised form will be posted to Hudclips once it clears the Paperwork Reduction Act and OMB approval process.  Until then, the Office of Housing has advised that this form is available in the MAP Guide Forms book, originally published in 2000, and that every Multifamily Program Center should have at least one copy of the Forms book.  Form FHA-2283 is obsolete and has been replaced with form HUD-2283.  The reference in Appendix 11 will be corrected in the next revision to the MAP Guide.

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20. (4/24/2012)                                                                                                                      The only place this formula (the liquidated damages calculation) is expressed seems to be in the old closing handbook. Can we restate this in the new closing guide?

The calculation of liquidated damages is a business, and not a legal, determination. The MAP Guide will be revised to include the proper calculation. For additional informational purposes, the formula will also be set forth in the Closing Guide.

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21. (4/14/2012)
The closing guide at 2.1.A.5 [EDITORIAL NOTE:  this should be 2.3.A.5]states that the address for notice to HUD in the Security Instrument and in the UCC-1 Financing Statements "shall be the Office of Housing in the local HUD Field Office." Lender's counsel completed the Financing Statement with the field office address as the mailing address shown in 12c of the form. In 12a Lender's Counsel listed the Additional Secured Party as "Secretary of Housing and Urban Development of Washington, D.C., their successors and assigns as their interests may appear." Lender's counsel says that other field offices require this language in 12a of the Financing Statement. Does the closing guide contemplate that 12a of the Financing Statement will list the Office of Multifamily Housing for the field office or should the Financing Statement list the Secretary of Housing and Urban Development of Washington, D.C. etc. as indicated by Lender's counsel?

The UCC-1 should indicate that the "Secretary of Housing and Urban Development of Washington, D.C., their successors and assigns as their interests may appear," is an additional secured party. Nonetheless, the address for HUD as a secured party is the field office address. The Closing Guide will be revised to clarify this point.

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 22. (4/16/2012)
I am working on a series of (d)(4) initial closings and have a question about title policy endorsements. Section 3.2C of the new Closing Guide lists the endorsements required for HUD-insured closings and includes the following: Construction Loan Pending Disbursement, ALTA Endorsement Form 32-06, if applicable; Future Advances, ALTA Endorsement Form 14-06, if applicable. After reading through these two forms, it seems like there's a good deal of overlap, in terms of the coverage provided. In the context of a (d)(4) initial closing, should we be collecting the 32-06, the 14-06, or both?

Where applicable, ALTA Form 32-06 (construction loan –loss of priority) should be used in conjunction with ALTA Form 33-06 (disbursement date-down). The reference to ALTA Form 14-06 (priority –future advances) appears to be in error, as this endorsement is primarily used with revolving loans; it will be deleted from the Closing Guide.

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 23. (7/03/2012)
There appears to be a mild discrepancy in the Closing Guide between Sections 3.8(D) and Section 5.3 in guidance relating to the rider for restrictive covenants. If we have restrictive covenants that impose rent restrictions/affordability requirements, and the parties are using the language from the HUD Rider, do we need to add language to incorporate Paragraphs 1 and 2 of Section 3.8(D) of the Closing Guide, or is the Rider, by itself, sufficient?

Yes, as you note, Section 5.3 already incorporates the provisions of Section 3.8(D), so if the Rider to
Restrictive Covenants is being attached to an instrument, no further revisions are necessary pursuant
to Section 3.8(D). The subordination provisions of 3.8(D) are meant to apply if no recorded instrument
sets forth rent restrictions, but rent restrictions are found in another, not recorded,
instrument. Section 3.8(D) of the Closing Guide will be revised to clarify and simplify this
requirement. Thank you!

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 24. (7/25/2012)
There appears to be an error in Part 5 of the Closing Guide. Namely, paragraph 11 of Section 5.2 should state, in relevant part: "...for so long as the Project is subject to a loan insured or held by HUD, any obligation of the [Corporation]...."

Correct. This was an omission and will be corrected in the next revision of the Closing Guide.

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25. (11/16/2012)
From what I understand, the ALTA Title Policy Endorsement forms were revised in April 2012 and, as a result, our guidance on title policies is both outdated and incorrect. If you look at the revised versions of the forms, the April 2012 version of ALTA 9.3-06 has been revised to remove coverage for encroachments, minerals, and private rights. ALTA 9-06 has been watered down to remove coverage for private rights.

Currently, our guidance indicates we should try to use 9.3-06 or, in the alternative, 9-06. For the reasons outlined above, we probably shouldn't be relying solely on these endorsements because they provide less coverage than what we were receiving pre-April 2012.

As a result, for all closing going forward, we should be getting both ALTA 9-06 and ALTA 9.6-06. We SHOULD NOT
be receiving just 9.3-06 because it lacks the coverage we have traditionally wanted. In the event someone
provides you with 9.3-06, you should still be getting 9-06 and 9.6-06.

We agree with the analysis and have determined that going forward HUD will require both the ALTA 9-06 and ALTA 9.6-06 in light of the recent changes to the ALTA 9 Series endorsements, provided the revised forms are approved for use in your state. Further, HUD will not accept the revised 9.3-06. In the event the revised forms are not yet approved for use in your state, please continue using the existing Closing Guide requirements (and pre-April 2012 forms) until the revised forms are available
for use. The next revision to the Closing Guide will incorporate these changes.

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 26. (11/25/2012)
I have a general question about the endorsements for the title policy. The closing guide states that we should get either Form 3.1-06 based on plans and specifications (for unimproved land) or Form 3.1-06 (for improved land and upon final closing) each with parking. It appears that the 3.1-06 is for improved land, but for unimproved land there appears to be the option for either the 3-06 or the 3.2-06. The 3.2-06 seems to be more comprehensive because it provides coverage for violations of specific items (such as floor space and setbacks). Should the closing guide reference be to the 3.2-06?

Yes, HUD will now require the new ALTA 3.2-06 for the zoning endorsement on unimproved land,
provided it is available for use in your state. If it is not yet available, use the ALTA 3-06. The next
revision to the Closing Guide will incorporate this change.

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 27. (12/19/2012)
On the Secondary Financing Rider (5.1), I suggest replacing "Junior Mortgage" with "Junior Loan" in paragraphs 8 and 9 as being more accurate, especially if the note is unsecured and there is no mortgage.

The secondary financing rider is to be used in the following circumstances per Section 3.3(b): “If a
private entity provides secondary financing, a Secondary Financing Rider setting forth HUD-required
provisions must be attached to any mortgage or similar security documents creating an encumbrance on the project real estate.” Thus, this would not be used in the unsecured note context. Since there won't be a case where there won't be a mortgage or similar security instrument where the secondary financing rider is used, 8 and 9 remain accurate with the use of the term “Junior Mortgage” intact.
We note the grammatical difference and in future the closing guide will seek greater stylistic unity
with respect to these terms..

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 28. (2/06/2013)
Why was the duration of the ownership entity requirement of ten years beyond the term of the FHA-insured mortgage (old MAP Guide Chapter 12.1.4.F) dropped from the Closing Guide, 5.2?

The current closing guide no longer requires an ownership entity to have a term pursuant to its organizational documents of at least 10 years beyond the maturity date of the FHA-insured mortgage. This requirement was removed pursuant to comments received by HUD field counsel and outside practitioners who noted that such requirement frequently caused unnecessary delay in closing. Although an ownership entity should have a term life at least as long as the term of the FHA-insured mortgage, there is no reason why the entity would need to have a term life 10 years beyond the maturity date. If the closed FHA-insured loan were to be re-financed to a longer maturity date, the entity's organizational documents could be amended at such future time, as necessary. There is no need to delay initial closing for potential events

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 29. (2/07/2013)
Section 3.2.D.4 of the Multifamily Program Closing Guide requires that the Surveyor's Report (and presumably the ALTA Survey) must be signed "by a licensed surveyor, not by an engineer, and bearing the surveyor's original signature and professional seal." The requirement for a "licensed surveyor" is also conveyed in Section 12.13 of the MAP Guide. Does this requirement also apply to jurisdictions that permit civil engineers who are not licensed surveyors to practice land surveying under state law, or does the less restrictive state standard prevail? For instance, the state of California exempts civil engineers registered prior to January 1, 1982 from its licensing standards and permits them to "engage in the practice of land surveying with the same rights and privileges, and the same duties and responsibilities of a licensed land surveyor" (see Section 8731 of the CA Business and Professions Code, otherwise known as the "2013 Professional Land Surveyors' Act"). Such surveys conform to state law requirement and bear the seal of a "Registered Professional Engineer."

HUD requires that the Surveyor’s Report and Survey must be performed and signed by a surveyor that is licensed. Any request to deviate from this requirement, e.g., to accept the signature of a “grandfathered” engineer that is not issued a surveyor’s license, should be submitted to the Headquarters Office of Multifamily Housing Development for consideration..

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 30. (8/15/2013)
Here are two minor typographical errors that need to be corrected in the Closing Guide and 221(d)(4) checklist: In the 2013 Closing Guide, 5.2 HUD Required Provisions, paragraph 11; the second (ii) should be changed to (iii); in the 221(d)(4) Initial Closing Checklist, item 39: The Completion Assurance Documents for Offsite Improvements section in the Closing Section is 3.5(D), not 3.5(E).

Thank you for bringing these errors to our attention, they will be corrected in the next issuance of the Closing Guide.

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31. (8/21/2013)
Closing Guide 2.3(5) [should be 2.3.A.5] states: "HUD shall be listed as an additional secured party, as follows: 'Secretary of Housing and Urban Development of Washington, D.C., their successors and assigns as their interests may appear,' and the address shall be the Office of Housing in the local HUD Field Office." We believe this statement is inaccurate in a few respects. First, if there is a successor to HUD, the successor, by application of law, may already succeed to the powers HUD has under the financing statement. Second, if there is an assign of HUD, we would be required to file a UCC-3 Amendment showing the actual assignment to the new party. Third, we do not believe there is a Secretary of Housing and Urban Development of "Washington, D.C." but rather, a "United States" Secretary of Housing and Urban Development.
1. The Official Comment to Section 9-511 "Secured Party of Record" in the Uniform Commercial Code states that application of law may result in a person succeeding to the powers of a secured party of record (i.e. mergers of corporations), in which case, the successor is authorized to take all actions that the original Secured Party would be authorized to take. The comment goes on to state that "acts taken by a person who is authorized under generally applicable principles of agency to act on behalf of the secured party of record are effective." Given the above, is it necessary to add "their successors" to HUD's name in the UCC financing statements?
2. Section 9-514 "Assignment of Powers of Secured Party of Record" states that a secured party may assign its power to authorize an amendment to the financing statement by filing an amendment to the financing statement identifying the original financing statement file number and providing the name of the assignor and name/address of the assignee. The comment section goes on to state that if an assignment is not filed, the assignor remains the secured party of record. Therefore, adding "and assigns" after HUD's name in the original financing statement will not effectuate an assignee's rights unless an actual UCC Amendment is filed. Therefore, we do not believe adding "and assigns" to HUD's name in the UCC financing statements will be effective.
3. Section 9-502(a)(2) of the Uniform Commercial Code states that for a financing statement to be sufficient it must, among other things, provide the name of the secured party or a representative of the secured party. Is there a Secretary of Housing & Urban Development for Washington, D.C. specifically? Should this simply read the "United States Secretary of Housing & Urban Development?"
In sum, we do not believe adding "successors and assigns as their interests may appear" to HUD's name in the UCC block for "additional secured party" is necessary or effective, and we believe HUD's name as "additional secured party" should be reflected as the "United States Secretary of Housing and Urban Development." If you could please advise as to these three items, we would be very appreciative. Thank you for your help.

While we agree with some of your assertions, such as the necessity to comply with local law requirements and the need for a UCC-3 assignment to effectuate a transfer, the current practice reflects HUD’s position that it has a security interest in the collateral and puts parties on notice of this interest.

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 32. 

(8/21/2013)
I am doing my first final closing review with the new MF documents (and FHA Closing Guide) and have a few observations/questions about the checklist:

(1) The checklist presents some ambiguity as to whether an Opinion of Borrower's Counsel is always required at final closing. Is it safe to assume that the intent is only to require an opinion if there is a mortgage increase (per past practice, and as discussed in Section 2.10.E of the FHA Closing Guide)? If so, I suggest adding an "If applicable" note in the Status and Comment Section. Same comment regarding checklist items 7, 9, 10 and 11.

(2) As a general note, the checklist might be more intuitive if it had two sections dealing with "Mortgage Increase"and "Mortgage Decrease" requirements.

(3) There does not seem to be a checklist item for post-initial closing Secondary Financing and/or Supplemental Bond/LIHTC Deliverables (or should this be considered a Special Condition?). In certain jurisdictions, like California, Borrowers don't qualify to utilize tax deductions associated with LIHTC financing until project improvements have been completed, so these will be items that are collected at final, rather than initial,
closing. On a related note, and assuming that we will only collect an Opinion of Borrower's Counsel for mortgage increases, I suggest listing the Bond/LIHTC opinions as a separate checklist item (perhaps as part of a "Supplemental Bond/LIHTC Deliverables" section?), rather than as a subcategory of the Opinion of Borrower's Counsel.

(4) Also, with regard to Bond/LIHTC deliverables that are not provided until final closing, is the expectation that we are to collect a supplemental Opinion of Borrower's Counsel that addresses Sections 3.8.F and 3.9.B of the FHA Closing Guide (or is the Lender's Opinion sufficient)?

(4) Also, with regard to Bond/LIHTC deliverables that are not provided until final closing, is the expectation that we are to collect a supplemental Opinion of Borrower's Counsel that addresses Sections 3.8.F and 3.9.B of the FHA Closing Guide (or is the Lender's Opinion sufficient)?

Thank you for your suggestions; suggestions like yours are greatly encouraged as we all gain more experience with both the closing guide and the new MF documents.
As a general matter, we are working on revising the sample checklists in the Closing Guide (as we review and revise the Closing Guide simultaneously) and will address each of your points more directly below.

1. You are correct and a notation to the item #3 (the opinion), to be noted “as applicable.” However, please note that the opinion is also required in cases where restrictive covenants have been placed on the property since initial closing and where other material modifications to documents have been made since initial closing and may also be required in other instances. With respect to item #7 (Certificate of Occupancy), the C of O is required whether or not a mortgage modification has occurred.
With respect to item #9 (Certificate Regarding Tenants’ Security Deposits), this item is already notated as “If applicable.” on the checklist.
With respect to item #10 (Special Conditions from Firm Commitment ), your comment will be taken into account during the next set of revisions to the checklist.
With respect to item #11 (Attendance List), your comment will be taken into account during the next set of revisions to the checklist.

2. This is a helpful suggestion and we will take it into account when revising the checklists.

3. Again, this is another helpful suggestion and will take it into consideration when revising the checklists.

4. Sections 3.8(F) and 3.9(B) both require that these particular opinions come from Borrower’s Counsel. Sections 3.8(G) and 3.9(C) require that these opinions be provided from Lender’s Counsel.

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 33. (11/06/2013)
The Closing Guide at 3.2.B.4 (page 53) requires that the title policy show "no other monetary liens," except approved secondary financing and other liens as may be shown as subordinate to the lien of the insured loan. The Guide provides that "Real estate taxes shall be shown as not yet due and payable; all due and payable taxes shall be paid prior to or at closing." One national title insurer insists that it cannot delete an exception on the title policy for municipal water and sewer charges. The title insurer, when pressed, will show the water and sewer charges as "not delinquent" but refuses to show the charges as "not yet due and payable" or to delete the exception from the policy. The title insurer states that "as soon as you turn on a water faucet at the property, the water bill is payable." Other title insurers delete the water and sewer charges for the same municipality without difficulty. Is it acceptable for water and sewer charges to be shown as an exception on the title policy with the note "not delinquent" rather than "not yet due and payable?"

Charges for water and sewer services that create a lien on the property and are considered due and payable must be paid before closing. It is not acceptable for the title company to take exception to charges that are “due and payable but not yet delinquent.”

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 34. (2/26/2014) 
In the index of the Multifamily Closing Guide 2013 the index shows that the Section 5-Sample Languages and Certifications goes to Section 5.9.  However on page 94 of the Multifamily Closing Guide it shows the index going to Section 5.10 because 5.7 is labeled a Payee Certification.  Where is the Payee Certification?  I would just like to clarify where the document is if it is not shown in the Multifamily Closing Guide 2013

It appears that the reference to the Section 5.7 Payee Certification on Page 94 should have been deleted. We will submit this for the next revision of the Closing Guide. Thank you for your question.

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 35. (03/11/2014)
I am working on a final closing for a 221d4. There has been no modification and there are no tax credits involved. As I read the closing guide and the checklist and an attorney opinion is still required. Lender's counsel feels otherwise. Can you please confirm whether we should be receiving an attorney opinion on all finals?

If there has been no modification and no tax credits involved there is no need for an attorney's opinion at final closing.

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 36. (7/02/2014)
Section 1.15.2 of the Closing Guide requires: "Sufficient funds from the final advance of mortgage loan proceeds shall be placed in escrow with Lender or an escrow agent approved by HUD. Such funds are to be released from escrow only upon Lender or escrow agent being furnished with simultaneous acknowledgment of payment by the general contractor and/or appropriate subcontractor or materialmen." Our office has a final closing in which there is just shy of $600,000 in unpaid sums owed to sub-contractors, and the parties are requesting that rather than escrow the funds, the funds be disbursed to the borrower who will pay the general contractor who in turn will pay the subs. The project was completed in September of last year (two items of delayed completion were approved this spring/summer). Borrower’s counsel has copies of lien waivers from the general and all of the subs and should be providing them shortly. He’s also pursuing the possibility of having the general provide at closing copies of the checks that will be given to the subs post-closing. The title policy will show the insured loan in first position and no liens from the subs. Local Housing staff indicated they are comfortable with the arrangement because the general contractor has paid all other amounts to this point.

Lender’s and Borrower’s counsel have pointed to the Request for Final Endorsement as permitting this arrangement. In that document, the Certificate of General Contractor requires the general to disclose any unpaid amounts and then states: "That, except for unfinished work covered by an approved escrow deposit, the undersigned agrees to pay the foregoing obligations in cash, within 15 days following receipt of payment from Borrower." This form clearly seems to anticipate that the general would in fact be the party who would disburse payments to the subs and appears to be in conflict with the policy guidance.
 
Borrower’s counsel has also pointed out that the privity of contract from the subs is with the general contractor, so any potential litigation would likely be against the general. It also appears that the mortgage was recorded before any construction was begun, so any liens that might still be permitted from the subs should be subordinate to the insured loan. Finally, the borrower is disclosing that it owes sums to the general, and that sum covers the amounts owed to the subs. If the waiver is not granted, then the parties are speaking with the title company to see if they would function as the escrow agent

The Closing Guide instructions regarding the escrowing of unpaid construction costs from the final advance of mortgage loan proceeds must be followed in this situation. We disagree with the suggestion that the closing instructions and the closing document language are in conflict. The current instructions and document language are consistent with previous versions- this is not new policy. Despite the issuance of a title policy indicating a first lien position for the insured loan and the general contractor’s positive payment history, we believe it is the more prudent approach to escrow unpaid construction items. This is particularly so given that no explanation has been provided as to exactly why the subcontractors cannot be paid at closing, along with HUD’s obligation to run a uniform, national mortgage insurance program. Further, HUD would undoubtedly be brought into any litigation if subs are not paid, even if the agency might ultimately prevail

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 37. (7/02/2014)
Section 3.8 of the Closing Guide discusses Bond Counsel Opinions. Here are a few ambiguities that should be cleared up in the next version of the Closing Guide: 1) Does the Bond Counsel Opinion need to include HUD as a party who may rely upon the opinion? Opinions are commonly made for the reliance of the Borrower, the entity issuing the Bonds, and the Bond Trustee. 2) Can you please clarify what requirements apply to other varieties of bonds, such as Industrial Development Authority ("IDA") bonds? The Closing Guide discusses Tax Exempt Bonds, but I don’t think Industrial IDA-type bonds are being considered by that guidance. IDA bonds are commonly used as a way to reduce sales or property taxes at a project site. Unlike Tax Exempt Bonds, IDA bonds may or may not require restrictive covenants.
As written, the guidance in the Closing Guide and the MAP Guide appear to be inapplicable to IDA bond transactions. For example, since there were not any restrictive covenants relating to the bonds which would encumber the land, I did not collect a Lender’s Attorney’s Opinion at initial closing because the information requested by HUD’s guidance appear to be inapplicable.

Section 3.8 of the forthcoming, 2014 Closing Guide, has been rewritten to address these questions. We will make an announcement when the new Closing Guide is published and becomes effective.

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 38. (7/21/2014)
How should the Certificate of Architectural/Engineering Fees be completed?  Is it signed by the borrower, or the architect, or both?  I was asking for the architect to show the design fee, list the amount, and show a $0 balance.  Others are having the document signed by the borrower and writing none across all blanks (name of firm, service provided, fee, and balance).  Should the design fee be shown?  Should the supervision fee be shown?

This form should be completed and signed by the borrower.  If the architect or other named professional fees are paid in full at initial closing when the document is collected by HUD, the amount listed under “Balance” should be $0, but the remaining lines should still be completed.  It is appropriate to show the architectural design fee, but the supervision fee is not shown on the form as it is typically escrowed and not paid when this form is collected.

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 39. (08/07/2014)
Section 3.2(C) of the Closing Guide requires an endorsement to the title policy regarding air rights, if applicable.  Is there an ALTA form that is contemplated for such air rights endorsement?  If not, what substantive matters should such an endorsement address?

The Closing Guide requirement to obtain a title policy endorsement specific to air rights is incorrect.  No such endorsement exits.  Instead, in addition to the ALTA endorsements required in the Closing Guide, the ALTA endorsements indicated below should be provided in connection with a transaction involving air rights, if available, and if applicable.  Note this list of ALTA endorsements is not exhaustive and depending on the structure of the transaction and state law, additional endorsements may be necessary.
 
The survey should leave no doubt that the “real estate” involved is comprised of air rights.  The Same as Survey endorsement, as well as ensuring the legal descriptions match perfectly as printed on the plat and in the policy, should mitigate any risk of the title insurer trying to deny coverage in the event some judicial or other authority decides that a mortgage lien cannot be enforced against the air rights parcels separately from the ground.
 

  •         17.1-06 Indirect Access and Entry
  •         17.2-06 Utility Access
  •         18-06 Single Tax Parcel or 18.01-06 Multiple Tax Parcel
    • The 18.01-06 provides coverage in addition to that which is provided in the 18-06 from loss incurred by  Insured resulting from any failure of tax payment leading to the termination of any Insured easement rights.
  •          19.1-06 Contiguity—Single Parcel
    • The contiguity should relate to the ground parcel and the air rights parcel.  In other words, the above/below relationship.  This is as opposed to the adjacent parcels (side to side) for which the endorsement is typically used. 
  •          26-06 Subdivision or 4-06 Condominium, depending on how the parcel was created

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40. (9/22/2014)
The September 1, 2011, Closing Guide at 3.7(B) (p. 61) states that the docket search needs to be done for the "Borrower and its general partner, manager or managing member . . . " I have a Borrower, a General Partner, and the GP's Managing Member entity. Do all three need docket searches, or only the first two?

A: According to the terms of this section (3.7.B) of the 2013 Closing Guide, HUD requires litigation docket searches for the first two parties listed. Please note that the lender may require additional searches, in which case the Closing Guide provides that HUD may request to review such additional searches.

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41. (10/16/2014)
Section 3.6(A) of the Closing Guide requires both the Arbitration and Mediation provisions be deleted in the Architect agreement. However, Section 14 of the B-108 Amendment only requires the Arbitration provision to be stricken. Which requirement controls?

A: Section 3.6(A) of the revised Closing Guide (issued October 2014) indicates that only the Arbitration provision must be stricken from the Owner-Architect Agreement.

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42. (01/08/2015)
 
Can the multifamily closing checklists link be updated?  This link is to the old (2013) closing checklists: 
http://portal.hud.gov/hudportal/HUD?src=/OGC_Multifamily_Closing_Documents_Checklist. Can we please update this to the 2014 lists?

A: We will be posting links to the 2014 checklists soon in a 2014 folder under Checklists.  For now, the checklists are available on this site via the link to the 2014 Closing Guide.

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43. (02/24/2015)
 
Re: 4.4 223(f) Closing Checklist (revised as of 10/2014) (attached to the 2014 Closing Guide). I am curious as to why the following documents were omitted from the newly-revised closing checklist: (1) EEO Certification; (2) Title VI Assurance of Compliance; (3) Borrower's Byrd Amendment Certificate; and (4) LIHTC Certificate.

These documents no longer appear on the closing checklists because they have been incorporated into the HUD-91070M, Consolidated Certifications – Borrower. Please note that Housing intends to require the HUD-91070M to be submitted with the Firm Commitment application as more fully explained in section 3.7.D. of the Closing Guide, included here for convenience. However, until the MAP Guide is revised and the new process becomes normalized, Closing Attorneys will need to work with their Housing counterparts to ensure that the required certifications have been collected.

Miscellaneous Certifications. As of 2014, HUD has developed a new form that contains many miscellaneous certifications that were previously submitted with the Firm Commitment application and at initial or initial/final closing. These certifications have been consolidated into form HUD-91070M, Consolidated Certifications – Borrower. Housing will add this document to the required Firm Commitment application exhibits in the next issuance of the MAP Guide, in addition to the Lender’s Byrd Certificate. Consistent with this forthcoming revision, form HUD-91070M should not be collected at closing, so as to avoid unnecessary duplication of work and signatures. The relevant old certifications have been removed from the Closing Checklists, with the exception of the Lender’s Byrd Certificate (until it is added to the required Firm Commitment exhibits collected at application stage). The Hub Director and HUD Closing Attorney must make sure that either the old certifications (until the revised MAP Guide is issued) or the executed form HUD-91070M is included with the Washington Docket. Please note that form HUD-91070M does not cover form HUD-92478M, Borrower’s Oath. This item remains on the Closing Checklists.

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44. (03/05/2015)
 
The counsel for a tax credit investor limited partner has asked for a clarification to Appendix 5.2 to the October 2014 MAP Closing Guide, the HUD provisions for the Borrower's organization documents, as summarized below. Appendix 5.2 of the October 2014 MAP Closing Guide requires the borrower's organization documents contain the following provision: "8[12]. The key principals of the Borrower identified in the Regulatory Agreement are liable in their individual capacities to HUD to the extent set forth in the Regulatory Agreement." However, there is not a definition of "key principals" in the body of the Regulatory Agreement and since it is not capitalized in the Appendix it is not a defined term. I understand that this phrase is meant to identify the "Section 50 party or parties" and these are the same parties identified in Section 50 Addendum of the Regulatory Agreement, Section 8 of the Note and Section 6 of the Mortgage. Most of the firm commitments I have received use the term "Authorized Signer of Section 50 of the Regulatory Agreement." The term also appears in Chapter 8 of the MAP Guide but is not a defined term. I can only find that the phrase appears once in the MAP closing guide and that is in the Appendix. Would it be acceptable to amend the language of Appendix 5.2 as follows: "The key principals of the Borrower, the key principals being those individuals/entities identified in Section 50 of the Regulatory Agreement are liable in their individual capacities to HUD to the extent set forth in the Regulatory Agreement."

We generally want to make as few changes as possible to the documents and suggested language in the Closing Guide. We realize, however, that the term “key principals” is not defined and can cause confusion. Therefore, if your transaction’s parties request a clarification, field counsel are authorized to approve a clarification that does not change the meaning of paragraph 12, such as the one suggested in the question or simply the following: “The key principals of the Borrower identified in THE SECTION 50 ADDENDUM TO the Regulatory Agreement are liable in their individual capacities to HUD to the extent set forth in the Regulatory Agreement.”

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45. (06/03/2015)
 
Based on the guidance in Section 2.11 L of the October 2014 FHA Multifamily Program Closing Guide, that telecommunications services shall be treated as other utilities, is it necessary to amend cable service agreements and easements to specifically exclude HUD from indemnification provisions applying to the owner of the property?

No. Longstanding guidance from OGC HQ has indicated that it is not necessary to specifically exclude HUD from indemnification provisions applying to the owner. While a number of years back Housing’s preference was for OGC to negotiate for excluding HUD if possible, OGC was not required as a matter of law to exclude them. Housing’s position has evolved on this topic as they have grown more comfortable with cable service agreements and it is no longer Housing’s preference for OGC to negotiate for the removal of these provisions or for HUD’s exclusions from them. Field counsel, please do not negotiate for the removal of these provisions or the specific exclusion of HUD from these provisions as such negotiations are not necessary.

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46. (06/15/2015)
 
We are representing the borrowers in several Section 207/223(f) loans. Section 10 of Part 5.2 of the Closing Guide (HUD-Required Provisions to Borrower's Organizational Documents) provides for the borrower to designate an official representative for all matters concerning the HUD project. For a corporation (for-profit or non-profit), can the organizational documents designate a particular office (i.e. President, Secretary, etc.) as the official representative instead of an individual? Allowing a particular office to serve as the official representative makes practical sense because it eliminates the need for a borrower's Bylaws to be constantly amended over the life of the loan (sometimes 40 years) to reflect new individuals taking on the role of official representative.

Yes. The Borrower’s Organizational documents may designate a position instead of an individual’s name as the official representative. However, the borrower must provide a letter to the Multifamily HUB or Program Center specifically identifying the name of the individual holding the particular office and provide timely written notice of any change

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47. (06/18/2015)
 
Paragraph 3.3D(1)(b) & (c) on page 61 of the Closing Guide references the use of a residual receipts note when the borrower is a nonprofit or limited distribution borrower entity. In addition, Paragraph 3.8D on page 69 of the Closing Guide reads, "...in the case of a nonprofit, residual receipts authorized for release by HUD...." Shouldn't these references to residual receipts be corrected since status as nonprofit no longer triggers the requirement of residual receipts?

Thank you for bringing these needed Closing Guide corrections to our attention. We will consider making the following corrections with the next issuance of the Closing Guide. Corresponding to these corrections, with the next round of PRA/OMB review and approval for the Multifamily closing documents (to be finalized in 2017), HUD will consider eliminating use of two separate Residual Receipts Note forms for new closings. One Residual Receipts Note form would be used in cases where there are residual receipts limitations imposed through HUD programs other than FHA, since FHA no longer has any active insurance programs that contain such restrictions based on entity type and/or underwriting.

3.3. D. Rules Concerning Unsecured Promissory Notes.

1. Unsecured promissory notes may be used to evidence Borrower debt incurred for the development of the project if approved by HUD. Such promissory notes may include:

a. Surplus Cash Note, form HUD-92223M (when Borrower is a for-profit entity not subject to residual receipts limitations); b. Residual Receipts Note, form HUD-91710M (when Borrower is a nonprofit entity subject to residual receipts limitations, as evidenced by a “Rider to Regulatory Agreement for Residual Receipts Requirements” ); and c. Residual Receipts Note, form HUD-91712M (when Borrower is a limited dividend entity.

3.8. D. HUD Subordination Language. The subordination provisions set forth in the HUD Rider/Amendment to Restrictive Covenants included in Part 5 of this Closing Guide shall be incorporated into any recorded document containing restrictive covenants. If there is an unrecorded legal instrument containing rent restrictions, such document must include language subordinating the rent restrictions to all applicable HUD mortgage insurance regulations and related administrative requirements, including Program Obligations, as defined in the HUD loan documents. Such instruments must not result in any claim against the project, the mortgage loan proceeds, any reserve or deposit required by HUD in connection with the mortgage loan transaction, or the rents or other income from the property (other than available surplus cash or, in the case of a nonprofit if applicable, residual receipts authorized for release by HUD).

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48. (06/18/2015)
 
A FAQ published on May 15, 2015 states the Security Instrument has been corrected to no longer include "Residual Receipts" as a defined term referenced in the Regulatory Agreement. However, the HUD Secondary Rider in Appendix 5.1 and the HUD Rider/Amendment to Restrictive Covenants in Appendix 5.3 in the Closing Guide continue to include Residual Receipts has the meaning specified in the HUD Regulatory Agreement.

Thank you for bringing these needed Closing Guide corrections to our attention. We will make necessary corrections with the next issuance of the Closing Guide. Until such time, HUD will accept the following corrections to the riders at 5.1 and 5.3 of the Closing Guide for closings that require use of either of these riders, without the need for HQ approval.

5.1:

9. As long as HUD or its successors or assigns is the insurer or holder of the Senior Mortgage, any payments due under the Junior Loan Documents shall be payable only from 75 percent of available “surplus cash” (or “residual receipts”) as that term is defined in the Regulatory Agreement (or “residual receipts,” if applicable, and as evidenced by a “Rider to Regulatory Agreement for Residual Receipts Requirements”) and subject to the availability of such surplus cash (or residual receipts) in accordance with the provision of said Regulatory Agreement. The restriction on payment imposed by this paragraph shall not excuse any default caused by failure of the Borrower to pay the indebtedness evidenced by the Junior Note.

5.3:

b) . . . "Residual Receipts" has the meaning specified in the HUD Regulatory Agreement Program Obligations.

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49. (11/30/2015)
 
Please clarify HUD's requirements for title agent letters of authority and closing protection letters.

The following is an excerpt from section 3.2.B of the FHA Multifamily Program Closing Guide concerning title agent letters of authority and closing protection letters, as revised in redline form to clarify HUD’s requirements. We anticipate making substantially similar changes in the next revision to the Closing Guide. Please follow this revised guidance until such time. Note also this guidance supersedes the Q&A issued 12/29/2011 on this same topic.

7. Lender or Lender’s counsel, as applicable, must disclose in writing to HUD at the time of submission of the draft closing package whether or not the title policy is issued by a broker title agent. If the title policy is issued by a broker title agent, rather than issued directly by the national title company, the agent shall provide a so-called closing protection or insured closing letter, or other equivalent letter of authority, on the letterhead of the national title company, indicating that the agent is in good standing with the national title company and has the authority to issue the policy for the transaction in the amount of the insured mortgage, which letter must be issued to Lender and HUD, as its interests may appear. The letter of authority must be dated (or state that the assertion is effective as of) the date of closing. In the event the agent provides escrow services and/or obtains documents necessary for the closing in addition to issuing the title policy, the agent must provide an ALTA Closing Protection Letter to the Lender and HUD.

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50. (2/5/2016)
 
In clarification of HUD’s anticipated change to section 3.2B of the Closing Guide (shown in external website at FAQ 49 under Closing Guide and FAQ 36 under Scrivener’s Corrections, both published on 11/20/2015) is it HUD’s intent to require a “letter of authority” IN ADDITION to an ALTA Closing Protection Letter or to clarify that a “letter of authority” is an alternative option in those instances where the policy issuing agent is issuing the title policy ONLY and NOT Acting as disbursement agent?

HUD’s response to the FAQs noted in your question establishes two requirements. First, if the title policy is issued by a broker title agent, rather than issued directly by the national title company, the agent is required to provide a letter of authority, on the letterhead of the national company, indicating that the agent is in good standing with the national title company and has the authority to issue the policy for the particular transaction. The letter should be addressed to the Lender and HUD and dated (or state that the authority is effective as of) the date of the closing. Second, if the agent also provides escrow services and/or obtains documents necessary for the closing, the agent must also provide an ALTA Closing Protection letter to the Lender and HUD.

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51. (4/25/2016)
 
Regarding the December 8, 2015 memo from Ted Toon to Multifamily field leadership concerning recording priority of HOME Program use restrictions, please clarify what was intended in the underlined sentence in the second to last paragraph, shown here. [Allowing HOME restrictions ahead of the FHA Security Instrument] will eliminate the need to consider amendments to the Rider/Amendment to Restrictive Covenants and associated waivers on a case by case basis, and at the same time remain consistent with the Department’s policy goals of preserving and expanding the supply of affordable housing. Additionally, state lending programs that provide secondary financing on terms similar to those under the HOME program may be considered for similar treatment but on a case by case basis.

The language in this question announces new Housing policy to allow other state and local program secondary financing programs with affordability restrictions that are similar to those in the HOME program to gain the advantages conferred to HOME program transactions through the memo.

As such, in order for the affordability restrictions to be recorded prior to the FHA Security Instrument, not only must they be similar to those of the HOME program, but the state or local program must also face threat of recapture (i.e., statutory or regulatory required payback to HUD or other original funding source, perhaps a state treasury) in the event the use restrictions are terminated prior to the mandated use period.

State or local programs should send written requests for what we are categorizing here as “HOME-like Program" use restriction treatment to the Multifamily Production staff in the Regional or Satellite Office with geographic jurisdiction and to HQs MF Technical Support Branch (currently, Tom Bernaciak) for consideration and a written response. Such requests must be accompanied by a detailed explanation of the state or local program and precisely how it is similar to the HOME program in terms of affordability restrictions and threat of recapture, including a discussion of the governing statutes and/or regulations. Further, HUD will not review and opine on such requests in connection with a specific project loan closing; they must be submitted with the project loan application.

Once it is established that a state or local affordable financing program satisfies these conditions, as determined and approved by HUD in writing, HUD will permit the associated use restrictions to be recorded ahead of the FHA Security Instrument on an across the board basis for that specific program, without requiring deal-specific approval from HUD. In such situations, the use restrictions will survive foreclosure of the FHA lien in order to both preserve the project as an affordable housing resource, and also to prevent the state or local instrumentality from being forced to repay the amount of the subordinate debt.

Keep in mind that this recently created HOME-like Program use restriction policy for state and local programs is but one of two avenues by which HUD will allow FHA-insured project loans with state or local secondary financing affordable housing use restrictions to be recorded prior to the FHA Security Instrument. The other such avenue is the existing “case by case” approach that has been in place for several years, and is discussed in sections 3.3.B & C of the FHA Multifamily Program Closing Guide and 14.19.D of the 2016 MAP Guide. Individual deals with state or local secondary financing that meet Housing’s existing case by case criteria, as determined by Housing field staff, may have their use restrictions recorded prior to the FHA Security Instrument for that transaction only.

Please note that prior to even considering whether affordable use restrictions may be recorded in first position pursuant to one of the two means described above, lenders and Housing staff must properly underwrite all secondary financing and related use restrictions for their impact on the project loan's viability and collateral. The Ted Toon memo does not intend a blanket approval for a given deal by virtue of a commitment of HOME or HOME-like Program funding. If the transaction clears underwriting, however, the use restrictions may be recorded in superior position if the funding source is HOME, HOME-like (as determined by HUD), or on a case by case basis (also determined by HUD).

One last note: in all instances where use restrictions are permitted ahead of the FHA Security Instrument, the HUD Rider/Amendment to Restrictive Covenants must be used, with the appropriate modification to remove the requirement that the restrictions terminate upon foreclosure. A sample of the modified HUD Rider/Amendment can be found on this page or by clicking here. No exceptions are permitted, as the HUD Rider/Amendment serves other important objectives beside termination of use restrictions upon foreclosure. Also recall that only pure restrictive covenants without lien rights may be recorded prior to the FHA Security Instrument under the National Housing Act.

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52. (4/29/2016)
 
May HUD insure multifamily mortgages under the National Housing Act in instances where the borrower entity does not directly own the requisite fee simple estate or eligible leasehold interest?

Yes, in certain limited situations and with appropriate closing documentation to ensure compliance with the National Housing Act, as set forth in this Q&A. Certain states, including Tennessee, have statutorily authorized programs that provide tax abatements to residential rental projects. In order to take advantage of such programs, private developers will transfer fee simple ownership of their project to the state or local development agency, and then enter into a ground lease with the state or local development agency for a duration that is shorter than required under the National Housing Act. Tennessee’s PILOT program, for instance, limits the ground lease tax abatement duration to 15 years. Through a joinder to the FHA-insured mortgage, as an accommodation to gain FHA-insured financing, the governmental agency agrees to allow its fee simple estate to serve as security for the FHA-insured loan. This arrangement is deemed a subordination of the fee (or “Joinder of the Fee”). For FHA purposes, a document titled, Rider to the Security Instrument – Fee Joinder (the “Rider”), should be used in these situations. Through this document, the governmental agency/ground lessor agrees to subject its fee simple interest to the FHA-insured Security Instrument so that the FHA lender has a first mortgage on real estate in fee simple for the entire term of the FHA loan. If the FHA borrower defaults under its obligations, then the FHA lender, HUD, or other purchaser at foreclosure sale (as applicable) will acquire fee simple title to the project.

FHA transactions requesting HUD approval for Joinder of the Fee must meet the following requirements:

  1. The project, borrower, and transaction must be administratively acceptable to Housing.
  2. Ground lessor must be a state or local unit of government or public entity created pursuant to state law.
  3. The project must benefit from a state or locally authorized tax abatement program.
  4. Lender’s counsel and the HUD closing attorney must ensure that under state law, the FHA Security Instrument represents a first lien on the entire fee simple estate of the project for the duration of the FHA Note. To this end, the sample Rider should be used in the transaction and a title insurance policy satisfactory to the FHA lender and HUD must be provided. The Rider can be found on this page or by clicking here.

Note that the governmental agency/ground lessor must be added to the first paragraph of the Security Instrument as an accommodating “Joinder Party.” This addition is necessary to ensure the proper indexing of the fee simple security interest granted by the Rider. While the governmental agency/ground lessor is added as a party in the first paragraph of the Security Instrument, the governmental agency/ground lessor will not be a signatory to the Security Instrument itself. In terms of the Rider, both the governmental agency/ground lessor and the borrower must execute this document. As the Rider grants an interest in land, state-law specific signature and attestation requirements must be met. Further, lenders must ensure the Security Instrument is not referred to as a Leasehold Mortgage/Deed to Secure Debt, et al. In light of the Rider, the Security Instrument must encumber the entire fee simple estate.

Similarly, the title insurance policy must not be a “Leasehold Loan Policy.” Instead, Schedule A2 should list both the Fee Estate and Leasehold Estate. Schedule A3 should similarly list both the governmental agency/ground lessor and the borrower. In Schedule A4, where the Security Instrument is listed, the Rider must be appropriately referenced. Schedule B, Parts I and II, should list all lender and HUD-approved exceptions and encumbrances pertaining to both the fee simple and leasehold estates.

HUD OGC is deliberating the necessity of using form HUD-92070M, Lease Addendum, with these structures. Until a final determination is made, lenders must follow the document change process set forth in the FHA Closing Guide to waive use of the form. As required by this process, HUD must receive sufficient legal and business justification as to why the form is not needed.

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53. (6/30/2016)
 
Are estoppel certificates or subordination agreements required for laundry leases (recorded or unrecorded) in 221(d)(4)SR, 223(f), 223(a)(7) transactions?

The Closing Guide guidance on commercial leases does not apply to laundry leases. HUD requires an SNDA for commercial leases where the commercial lease provides predictable, stable income streams for insured properties, and HUD wants the lessee to attorn to a new owner if there is a default and either HUD or the lender takes title to the property. With laundry leases, the primary focus of the laundry lease to is to ensure laundry services to the building; they are not what we consider to be “commercial leases.” The underwriting is not dependent on the laundry lease. The amount of income, if any, is usually relatively small, so it is not as important to the financial stability of a project if the laundry provider breaks the lease or insists that it be retained. If the laundry lease is recorded, HUD counsel will need to review for lien priority issues. If HUD counsel identifies any lien priority issues, then a subordination agreement might be needed, but such a determination will be made on a case by case basis.

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