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Multifamily Document Reform Implementation Frequently Asked Questions

Note

If you have additional questions about this document, please submit it to MultifamilyDocumentReview@hud.gov.

  1. Are the key principals to sign Section 8?  Or are their names just typed?  I thought they were supposed to sign to indicate their acceptance of liability related to bad boy acts, but it isn’t clear that we’re looking for signatures.
  1. Is there any cap on the amount of the late charge?
  1. Why does the note contemplate allowing the law of another jurisdiction (not the property  jurisdiction) to control? 
  1. In the new Note, paragraph 9(c) (see below) they are asking for the number of days before maturity that the loan can be prepaid without a prepayment premium. In most cases, the prepayment premium goes to Year 10. This would mean that for a 223(f) with a 35 year amortization, there would be 25 years or 9.125 days that the loan could be paid without prepayment premium. Is this really what they want in this section (the number of days) 9d? Notwithstanding the provisions of subsections (a) and (b) above, no prepayment premium shall be payable with respect to (a) any prepayment made, other than as a result of acceleration, no more than _____ days before the Maturity Date, (2) any prepayment occurring as a result of the application of any insurance proceeds or condemnation award under the Security Instrument, or (3) any reduction in the original principal amount of the Loan, or any prepayment resulting from any cost certification or other report required by HUD pursuant to Program Obligations.
  1. If the case number on the note is wrong and it was not caught before it was recorded, can the correct case number be typed/written in or does it need to be re-signed by borrowers and re-recorded?
  1. The MAP Guide requires the following language to be inserted into the Note for deals involving GNMA securities and prepayment lockouts/penalties: "Notwithstanding any prepayment prohibition imposed . . . the indebtedness may be prepaid in part or in full on the last or first day of any calendar month...." Can "last or first day of any calendar month" be changed to "last day of any calendar month"? Lender's counsel has requested this change, noting that the lender has to pay the GNMA investor interest for the full month, and if a loan is paid off on the first day of the month, the borrower stops paying interest and the lender would have to pay it out of pocket. 
  1. On the endorsement panel of the note, the language at the bottom applicable for (a)(7) projects refers to "maker" instead of "borrower". Should we change this so the terminology is consistent? 
  1. In GNMA transactions, Section 9(c) permits prepayment without a premium in three circumstances. In the rider containing the prepayment premium, the somewhat standard language included ("Notwithstanding any provision in this Note to the contrary--except Paragraph E to this Rider, "HUD Override") seems to override the permissive prepayment. Is that outcome something that HUD will permit? Also, are the parties permitted to expand upon the 223f prepayment restriction language by including the language from 12.4.5.A of Chapter 12 of the old MAP guide? Likewise, should they still include the HUD override language in the rider (this particular rider does contain that language)? 
  1. Section 9(a) of the MF note refers to an attached Rider 1. Is there a standard form of Rider? What items can we expect to see in the rider? The rider I'm reviewing indicates "Subject to section 9(h), this Rider modifies the terms and conditions if any contained in the note relating to prepayment premiums." Is this acceptable? 
  1. For (a)(7) projects, I thought we used to put the date for applicable regulations for debenture payouts as the commitment date of the original project, not the date of the (a)(7) commitment. In looking through past memos/instructions I was unable to find any guidance on which date to use. 
  1. 4/13/2012                                                                                                                                                    Section 11.7.D.1 of the new MAP Guide states that late charges must not exceed two cents per dollar of unpaid principal and interest that is more than 15 days in arrears. Section 7 of the Note requires late charges to be assessed after 10 days in arrears. I am getting questions from lender's counsel and need clarification. 
  1.  4/26/2012                                                                                                                                                    Editorial correction to the Note, in Section 6. 
  1. 4/26/2012                                                                                                                                                     The note provides for late penalties after 10 days and an assignment upon default after 30 days. There is no provision for a grace period so theoretically a lender can accelerate the debt if the payment is one day late. Would it be reasonable to express a grace period in the note? 
  1. 5/1/2012                                                                                                                                                    Editorial correction to paragraph 9(a), (Alternative B), on page 6 of the Note. 
  1.  9/5/2012
    In the endorsement panel of the note for a refi (223(f) or 223(a)(7)), can the words "to the extent of advances approved by HUD" be stricken? The loan is disbursed in full at closing so there are no advances, but this language doesn't seem to hurt. What is HUD's position on striking this language?
  1.  9/26/2012
    I am working with a project that has a Sec 8 contract and also a LIHPRHA Use Agreement. The project was recently acquired and a new 20 year Sec 8 contract was entered into. The financing of the project to acquire and rehabilitate was a combination of Bond financing and Seller's promissory note which both require monthly debt service payments. Is the Seller's promissory note required to be paid from "surplus cash"?
  1.  3/08/2013
    Folks are finding this syntax confusing. I am told different offices are requiring different dates in the space below where I have entered XXXXX. Some think it is the date of the Note, others think it is the date of the Endorsement. I am sure others think it is something else. Can you clarify this? "FOR USE ONLY WITH LOANS TO BE INSURED PURSUANT TO SECTION 223(a)(7): For purposes of compliance . . . , as evidenced by HUD's endorsement for insurance of this Note dated _____XXXXX_____, executed by . . . . "

 

  1.  5/10/2013
    The clause "as evidenced by HUD's endorsement for insurance of this note dated ______" is ambiguous: It can mean either the Date of the note or Date of the endorsement. It is also confusing because of the use of the phrase "date of endorsement" in the same sentence. The date of the closing has nothing to do with the commonly accepted meaning of the word "endorsement." The legal definition of the word "endorsement" is "the placing of a signature, sometimes with an additional notation, on the back of a negotiable instrument to transfer or guarantee the instrument or acknowledge payment" or the signature of the notation itself. (Black's legal dictionary). The UCC's definition of the term "Indorsement" is a signature, other than that of a signer as maker, or acceptor, that alone or accompanied by other words is made on a negotiable instrument for the purposes of (i) negotiating the instrument (ii) restricting payment of the instrument or (iii) incurring indorser's liability on the instrument. See UCC Article 3, Official Text, Sec. 3-204. The dictionary definition of the word "endorsement" is (1) literally, to sign on the back or more generally, approval. In this context, "endorsement of the note" really means HUD's approval of the note as evidenced by HUD's signature in the endorsement panel. If that date of closing goes in the blank in the last sentence of the endorsement panel of the new Multifamily note, then the last sentence really means that the contract of insurance with respect to the old loan is transferred to the new loan and the terms of the contract [HUD's rules and regulations] in effect on the day the loan is refinanced apply.

    If so the last sentence should be revised by striking "as evidenced by HUD's endorsement for insurance of this Note dated", and "executed by ________ (Borrower), and payable to _______", and substituting "in effect on [date of closing]." The last sentence would then read: "For purposes of compliance with Section 223(a)(7)(A)(iv) of the National Housing Act, as amended, the Contract of Insurance regarding HUD Project No. [Old Project Number] is transferred to HUD Project No. [New Project Number], and said Contract of Insurance is hereby amended to reflect the terms, conditions and provisions of the National Housing Act, as amended, in effect on [date of closing]."

  1.  8/09/2013
    I am working on a 223(a)(7) refinancing of a 223(f) loan. The 223(f) refinance took place more than five years ago in 2007. Paragraph (h) of the HUD Mortgage Note form states the following: "[To be included if the Loan is insured under Section 207 pursuant to Section 223(f) of the National Housing Act, as amended. If the Loan is NOT insured under Section 207 pursuant to Section 223(f) of the National Housing Act, as amended, subparagraph (H) should be stricken] (h) Notwithstanding any other provision of this Note to the contrary, this Note may not be prepaid either in whole or in part for a period of five (5) years from the date of endorsement of this Note, except in cases where the prior written approval of HUD is obtained and such written approval is expressly based on Borrower and HUD entering into a HUD-approved use agreement to maintain the Mortgaged Property as rental housing for the remainder of the specified five (5) year period." Since I am refinancing a 223(f) loan, does paragraph (h) get stricken or should it stay in the document? Since the original loan was more than five years ago, HUD has presumably satisfied its interest in keeping the property as rental housing for five years, so I don't think we need this language any more, but I would like your opinion.
  1. 2 /06/2014
    I am reviewing draft closing documents for a Section 223(f) loan and have the following concerns with the Promissory Note, form HUD-94001M (REV. 04/11). I am requesting your guidance on how I should proceed. In the Promissory Note, form HUD-94001M (REV. 04/11), at paragraph 9(h) under the division for loans that are to be insured under Section 223(f) of the National Housing Act, the preprinted language appears to be inconsistent with 12 U.S.C. 1715n Section 223(f)(3) and the MAP Guide at Section 3.9 G. The pertinent language in 94001M states: Notwithstanding any other provision of this Note to the contrary, this Note may not be prepaid either in whole or in part for a period of five (5) years from the date of endorsement of this Note, except in cases where the prior written approval of HUD is obtained and such written approval is expressly based on Borrower and HUD entering into a HUD-approved use agreement to maintain the Mortgaged Property as rental housing for the remainder of the specified five (5) year period. However, the National Housing Act permits prepayment under three other circumstances, which are not set out in 94001M. They are: (1) HUD determines that the conversion of the property to a cooperative or condominium ownership is sponsored by a bona fide resident organization representing the majority of households in the project; (2) HUD determines that continuation of the property as rental housing is unnecessary to assure adequate rental housing for low and moderate income residents of the community; or (3) HUD determines that continuation of the property as rental housing would have an undesirable and deleterious effect on the community.
     
  2.  3/05/2014
    We respectfully request reconsideration of the response to Note FAQ #15 [see external website].  That FAQ and HUD’s response reads as follows:  “15. 9/6/2012  In the endorsement panel of the note for a refi (223(f) or 223(a)(7)), can the words "to the extent of advances approved by HUD" be stricken? The loan is disbursed in full at closing so there are no advances, but this language doesn't seem to hurt. What is HUD's position on striking this language?  Language in the closing documents cannot generally be stricken unless there is good cause to do so and the removal has been approved by the Associate General Counsel for Insured Housing. We have determined that it is not necessary to strike this language ("to the extent of advances") for 223(f) and 223(a)(7) transactions. If a particularized request is made for such a change it must be submitted in accordance with existing guidance.”
     

    3. For construction loans, HUD issues a “Commitment for Insurance of Advances” (form HUD-92432), whereby HUD agrees to provide final endorsement for insurance “to the extent of advances of mortgage proceeds approved by the Commissioner” (Section 5(c) of form HUD-92432).  In contrast, for loans insured under Sections 223(f), 223(a)(7), or 221(d) insurance upon completion, HUD issues a “Commitment to Insure Upon Completion.”  For construction loans, the evident purpose and effect of the “to the extent of advances approved by HUD” phrase in the Note is to limit HUD’s insurance obligation to the sum total of HUD-approved advances.  Until final closing, the approved advances (and HUD’s insurance obligation) will be less than the face amount of the Note.  For loans that involve insurance of advances, the actual amount of the insurance is filled in at final endorsement, and the amount specified in the final endorsement replaces the “to the extent of advances” limitation included in the initial endorsement.  If the sum total of HUD-approved advances at final closing is less than the face amount of the Note, HUD requires modification of the note to reduce the principal amount of the note correspondingly.

    5. Subsequent to the issuance of Note FAQ #15, HUD has addressed and clarified this matter in at least the following two instances:
         a. In the 2013 Lean form of Healthcare Facility Note, the endorsement panel of the form includes this text:  “[FOR USE ONLY WITH INITIAL CLOSING FOR CONSTRUCTION PROJECTS: to the extent of advances approved by HUD.]”  Also, Section 3 (“Payment of Principal and Interest”) of the Lean form contains the same distinctions as to references to advances as discussed above regarding the Multifamily form.
         b. The proposed updated form of Multifamily Note released for public comment in October 2013 provides differing endorsement panels based on the applicable National Housing Act section.  For Notes to be endorsed pursuant to Section 223(a)(7) or Section 223(f), the phrase “to the extent of advances approved by HUD” is not included.  That phrase is included only in the endorsement panel for New Construction/Substantial Rehabilitation loans.
  1. 3/6/2014                                                                                                                                                          Why is there no room for the name of the borrower on the first page of the note? The debtor should be named as well as the lender (there is room for the lender’s name). Given that it is Borrower who is the obligor, and that the note is a multipage document, to refer to the debtor only as the “undersigned” and have the name revealed for the first time only on the signature page is a bit of a risk. 
  1. 5/7/2014
    I have a question on the override language for the Note rider. The MAP guide requires that the following language be included in the rider for transactions involving GNMA financing: "Notwithstanding any prepayment prohibition imposed and/or penalty required by this Note with respect to prepayments made prior to ... [enter first date on which prepayments may be made with a penalty of one percent or less] the indebtedness may be prepaid in part or in full on the last or first day of any calendar month without the consent of the mortgagee and without prepayment penalty if HUD determines that prepayment will avoid a mortgage insurance claim and is, therefore, in the best interests of the Federal Government." I have had an attorney request that the highlighted language be changed to simply the last day of any month because of the way GNMA deals work. Given that there doesn't appear to be much detriment to HUD in specifying only the last day (one day difference), is this change permissible?

 

 

 

 

 
1.  Are the key principals to sign Section 8?  Or are their names just typed?  I thought they were supposed to sign to indicate their acceptance of liability related to bad boy acts, but it isn’t clear that we’re looking for signatures.

The individuals identified in section 8 (derived from the names listed in the firm commitment and section 50 of the Regulatory Agreement) should only have their names typed in and are not required to sign the note.  These individuals only sign the Regulatory Agreement, as the agreement between HUD and the borrower.

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2.  Is there any cap on the amount of the late charge?

Maximum late charges will be determined by Program Obligations.

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3.  Why does the note contemplate allowing the law of another jurisdiction (not the property jurisdiction) to control? 

The note includes standard commercial form language.  Because another section of the form does not expressly indicate otherwise, the law of the Property Jurisdiction shall apply.

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4.  In the new Note, paragraph 9(c) (see below) they are asking for the number of days before maturity that the loan can be prepaid without a prepayment premium. In most cases, the prepayment premium goes to Year 10. This would mean that for a 223(f) with a 35 year amortization, there would be 25 years or 9.125 days that the loan could be paid without prepayment premium. Is this really what they want in this section (the number of days) 9d? Notwithstanding the provisions of subsections (a) and (b) above, no prepayment premium shall be payable with respect to (a) any prepayment made, other than as a result of acceleration, no more than _____ days before the Maturity Date, (2) any prepayment occurring as a result of the application of any insurance proceeds or condemnation award under the Security Instrument, or (3) any reduction in the original principal amount of the Loan, or any prepayment resulting from any cost certification or other report required by HUD pursuant to Program Obligations. 

No. This provision is not intended to be read in this way. This provision intended to allow the Borrower to repay the loan essentially upon maturity but without having to wait for the specific maturity date to avoid a prepayment penalty. Note that this provision does not impose a prepayment penalty where one does not otherwise exist (such as when the 10 year lockout period has expired, in your example). The exact number of days may be determined by the Lender, and typically, the Lender would use something like 30, 60, or 90 days.

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5.  If the case number on the note is wrong and it was not caught before it was recorded, can the correct case number be typed/written in or does it need to be re-signed by borrowers and re-recorded?

The Note is generally not recorded. If the FHA Project Number on the Note is not correct, the Note should be modified with an appropriate correction page reflecting the correct number. If a recorded document has the wrong FHA Project Number then an appropriate modification to that document should be prepared that corrects the error and that document should be recorded. Care should be taken to ensure that recording the modified document does not adversely impact the priority of position of the previously filed document.

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6. The MAP Guide requires the following language to be inserted into the Note for deals involving GNMA securities and prepayment lockouts/penalties: "Notwithstanding any prepayment prohibition imposed . . . the indebtedness may be prepaid in part or in full on the last or first day of any calendar month...." Can "last or first day of any calendar month" be changed to "last day of any calendar month"? Lender's counsel has requested this change, noting that the lender has to pay the GNMA investor interest for the full month, and if a loan is paid off on the first day of the month, the borrower stops paying interest and the lender would have to pay it out of pocket.

This language is included in Section 9(a) of the note (Alternative B). A typo in this section has been identified and will be corrected. The insertion of the last day of the calendar month will be allowed.

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7. On the endorsement panel of the note, the language at the bottom applicable for (a)(7) projects refers to "maker" instead of "borrower". Should we change this so the terminology is consistent?

This term will be corrected in the document and the note will posted on HUDclips.

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8. In GNMA transactions, Section 9(c) permits prepayment without a premium in three circumstances. In the rider containing the prepayment premium, the somewhat standard language included ("Notwithstanding any provision in this Note to the contrary--except Paragraph E to this Rider, "HUD Override") seems to override the permissive prepayment. Is that outcome something that HUD will permit? Also, are the parties permitted to expand upon the 223f prepayment restriction language by including the language from 12.4.5.A of Chapter 12 of the old MAP guide? Likewise, should they still include the HUD override language in the rider (this particular rider does contain that language)?

A couple points of clarification are needed:
(1) Regarding 223(f) transactions, the simplified terms of the Note Section 9(h) state that for 223(f) transactions, there is generally a prepayment lockout for 5 years, but that HUD may waive the 5-year lockout under certain circumstances. These circumstances are set forth in the revised MAP guide at Section 3.9(G).

(2) Regarding GNMA transactions, the HUD-required language found in MAP Guide Section 11.7(c)(1) has been incorporated into the body of the Note at Section 9(a) (Alternative B). Please note that the current language in Section 9 is confusing, due to scrivener's error, and is in the process of being clarified and re-published. However, the substance of the provision will remain the same, and is consistent with the old and revised MAP Guides: that in a GNMA transaction, HUD may override any prepayment penalties set forth on the Note's Rider in order to avoid a mortgage insurance claim.

(3) The 223(f) and GNMA provisions described above are not in conflict. In a 223(f) transaction involving GNMA-backed securities, HUD would be able to override any prepayment penalties if HUD felt it necessary to avoid a claim, and would consider doing so within the first five years if the circumstances set forth in MAP Guide Section 3.9(G) were met.

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9. Section 9(a) of the MF note refers to an attached Rider 1. Is there a standard form of Rider? What items can we expect to see in the rider? The rider I'm reviewing indicates "Subject to section 9(h), this Rider modifies the terms and conditions if any contained in the note relating to prepayment premiums." Is this acceptable?

No. HUD does not have a standard form of Rider to the Note. However, MAP Guide, at Section 11.7(c) contains provisions that must be included in the Rider.
For Section 223(f) transactions, the proposed language beginning “Subject to section 9(h)” is an acceptable qualification to the required Rider provisions.
Please note that the current language in Section 9 of the Note and Section 11.7(c) of the MAP Guide are in the process of being clarified and re-published.

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10. For (a)(7) projects, I thought we used to put the date for applicable regulations for debenture payouts as the commitment date of the original project, not the date of the (a)(7) commitment. In looking through past memos/instructions I was unable to find any guidance on which date to use.

Use the new 223(a)(7) commitment date. Debenture interest is computed from the date of default, “at the rate in effect as of the date the commitment was issued, or as of the date of initial insurance endorsement of the mortgage, whichever rate is higher.” See 24 CFR 207.259(e)(6). Thus, in a Section 223(a)(7) scenario, in the event of a default and subsequent claim for mortgage insurance benefits, debenture interest would be computed as of the date of the new Section 223(a)(7) loan’s commitment or the date of initial endorsement of the Section 223(a)(7) loan, depending on the higher rate.

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11. 4/13/2012                                                                                                                                                              Section 11.7.D.1 of the new MAP Guide states that late charges must not exceed two cents per dollar of unpaid principal and interest that is more than 15 days in arrears. Section 7 of the Note requires late charges to be assessed after 10 days in arrears. I am getting questions from lender's counsel and need clarification.

The provision in section 7 of the Note that requires payment of late charges beginning ten days after the amount is due is controlling. This is consistent with the change from fifteen to ten days in the Department's regulation covering late charges, 24 C.F.R. section 200.88 (effective September 1, 2011). 76 Fed. Reg. 24363, 24369 (May 2, 2011). Note that section 11.7.D.1 of the MAP Guide will be corrected from fifteen to ten days with the next issuance of revisions to the MAP Guide.

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12. 4/26/2012                                                                                                                                                       Editorial correction to the Note, in Section 6.

Insert “for a period of thirty (30) days", in Section 6 of the Note, in the first sentence,
immediately after the word “continuing.”

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13. 4/26/2012                                                                                                                                                                     The note provides for late penalties after 10 days and an assignment upon default after 30 days. There is no provision for a grace period so theoretically a lender can accelerate the debt if the payment is one day late. Would it be reasonable to express a grace period in the note?

It is correct that as presently constituted, the Note (and Security Instrument) does not contain a grace period allowing Borrowers an opportunity to cure a Monetary Event of Default (by means of tendering the missed monthly payment and late charges) in the event Lender immediately accelerates the debt. It appears this was an unintended result of a change made to the definition of Monetary Event of Default in Section 22(a) of the Security Instrument with the last set of document reform revisions, whereby the Department eliminated from the definition a thirty (30) day period that would have been necessary before a Monetary Event of Default could be established and the debt accelerated.


As discussed in the preamble to the issuance of the final rule to update the Department’s regulations as a result of the new HUD Multifamily closing documents and related policies, HUD intended to make certain changes in response to a commenter’s concern that it was unclear whether the 30 day period then contained in the definition of Monetary Event of Default was in addition to, or coterminous with, the 30 day period described in the regulations (24 C.F.R. § 207.255(a)(3) that Lenders must wait before they are eligible to receive mortgage insurance benefits (subject to the claim regulations). 76 Fed. Reg. 24363, 24366 (May 2, 2011). HUD agreed with the comment that the two 30 day time periods were to run simultaneously, rather than sequentially, so that Lenders would not have to wait a total of 60 days before they were eligible to commence the mortgage insurance claim process. HUD consequently removed the 30 day period from the definition of Monetary Event of Default in the Security Instrument to avoid this confusion, and in doing so, inadvertently eliminated Borrowers’ right to a grace period before Lenders could accelerate.


It was not HUD’s intent through this revision to the definition of Monetary Event of Default to overturn the longstanding policy contained in the previous FHA mortgage and note, which effectively provided Borrowers a grace period for a default for nonpayment by authorizing Lenders to accelerate the debt only after “such default is not made good prior to the due date on the next such installment . . . .” This oversight is evident in the Department’s response to the commenter’s concern discussed above, where HUD stated in the preamble “[b]oth the regulation and the Security Instrument provide that if the default is not cured within 30 days, then the lender will be able to accelerate.” While the regulations in 24 C.F.R. § 207.256(a) do in fact refer to the 30 days Lenders must wait before they may commence the mortgage insurance claim process as a “grace period,” the preceding statement from the regulatory preamble concerning the 30 day period to cure is not accurate with respect to the Security Instrument (and Note). Nonetheless, it is clear from its response that HUD intended to require in the documents that Lenders wait a period of 30 days within which Borrowers could cure a Monetary Event of Default before being able to accelerate.


As a result of this scrivener’s error, the Department is making the following corrections to the Note and Security Instrument provisions governing Acceleration:
In Section 6 of the Note, in the first sentence, insert “for a period of thirty (30) days” immediately after “continuing”.


In Section 43 of the Security Instrument, in the first sentence, insert “for a period of thirty (30) days” immediately after “continuing.”
The revised documents will be posted to HUDclips.
 

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14. 5/1/2012                                                                                                                          Editorial correction to paragraph 9(a), (Alternative B), on page 6 of the Note.

REVISED ANSWER (published 5/2012 to correct previous answer published 11/17/11 which has been deleted from the site. Language that follows matches document in HUDclips). Section 9(a) (Alternative B) should read: "This Note contains a prepayment restriction and prepayment premium charge acceptable to HUD as to term, amount, and conditions, which are set forth in the attached Rider 1, including that in the event of a default, pursuant to Program Obligations, HUD may override any lockout or any prepayment premium, or combination thereof, in Rider 1 on the  last day of any calendar month during any year in which the prepayment premium is greater than one percent (1%) in order to facilitate a partial or full refinancing of the Mortgaged Property and avoid a mortgage insurance claim.” The originally published Note had a scrivener’s error in the text, and we had previously published slightly different language to the same effect, but the foregoing language is the language to be used going forward. Please note that the Note has
been revised accordingly and published on HUDClips.

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15. 9/6/2012                                                                                                                          In the endorsement panel of the note for a refi (223(f) or 223(a)(7)), can the words "to the extent of advances approved by HUD" be stricken? The loan is disbursed in full at closing so there are no advances, but this language doesn't seem to hurt. What is HUD's position on striking this language?

Language in the closing documents cannot generally be stricken unless there is good cause to do so and the removal has been approved by the Associate General Counsel for Insured Housing. We have determined that it is not necessary to strike this language ("to the extent of advances") for 223(f) and 223(a)(7) transactions. If a particularized request is made for such a change it must be submitted in
accordance with existing guidance.

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16. 9/26/2012                                                                                                                                                    I am working with a project that has a Sec 8 contract and also a LIHPRHA Use Agreement. The project was recently acquired and a new 20 year Sec 8 contract was entered into. The financing of the project to acquire and rehabilitate was a combination of Bond financing and Seller's promissory note which both require monthly debt service payments. Is the Seller's promissory note required to be paid from "surplus cash"?

All secondary financing must be in compliance with Program Obligations, including but not limited to MAP Guide Section 8.9, 24 CFR 200.71 and Closing Guide Section 3.3. MAP Guide Section 8.9 speaks to what funds can be used to pay debt service on a secondary financing promissory note (e.g. Surplus Cash Note HUD Form 92223M; HUD-91710M, Residual Receipts Note Non Profit Mortgagor; HUD 91712, Residual Receipts Note Limited Dividend Mortgagor; as applicable). Further guidance can be provided
by the HUD attorney or program manager, as applicable.

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17. 3/08/2013                                                                                                                                                    Folks are finding this syntax confusing. I am told different offices are requiring different dates in the space below where I have entered XXXXX. Some think it is the date of the Note, others think it is the date of the Endorsement. I am sure others think it is something else. Can you clarify this? "FOR USE ONLY WITH LOANS TO BE INSURED PURSUANT TO SECTION 223(a)(7): For purposes of compliance . . . , as evidenced by HUD's endorsement for insurance of this Note dated _____XXXXX_____, executed by . . . . "

We agree that the syntax of this sentence is not particularly clear; however, because HUD's insurance obligations are effective as of the date of endorsement of the Note, the blank on the endorsement panel should state the date of the endorsement, not the date the Note was executed by the borrower. In other words, the "date of endorsement" is not the date of the Note (which may be dated the first day of the month or any other day prior to closing that is convenient for the parties), nor is it the date that the HUD personnel authorized to execute the endorsement panel physically signs the endorsement panel. Rather, it is the date of closing (which is the date that endorsement becomes effective because it is the date that HUD's requirements have been sufficiently met so as to allow the handing over of the endorsed Note). Therefore, to ensure that the correct information is inserted, the blanks in the endorsement panel should be filled in by the HUD attorney at closing.

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18. 5/10/2013                                                                                                                                                    The clause "as evidenced by HUD's endorsement for insurance of this note dated ______" is ambiguous: It can mean either the Date of the note or Date of the endorsement. It is also confusing because of the use of the phrase "date of endorsement" in the same sentence. The date of the closing has nothing to do with the commonly accepted meaning of the word "endorsement." The legal definition of the word "endorsement" is "the placing of a signature, sometimes with an additional notation, on the back of a negotiable instrument to transfer or guarantee the instrument or acknowledge payment" or the signature of the notation itself. (Black's legal dictionary). The UCC's definition of the term "Indorsement" is a signature, other than that of a signer as maker, or acceptor, that alone or accompanied by other words is made on a negotiable instrument for the purposes of (i) negotiating the instrument (ii) restricting payment of the instrument or (iii) incurring indorser's liability on the instrument. See UCC Article 3, Official Text, Sec. 3-204. The dictionary definition of the word "endorsement" is (1) literally, to sign on the back or more generally, approval. In this context, "endorsement of the note" really means HUD's approval of the note as evidenced by HUD's signature in the endorsement panel. If that date of closing goes in the blank in the last sentence of the endorsement panel of the new Multifamily note, then the last sentence really means that the contract of insurance with respect to the old loan is transferred to the new loan and the terms of the contract [HUD's rules and regulations] in effect on the day the loan is refinanced apply.

If so the last sentence should be revised by striking "as evidenced by HUD's endorsement for insurance of this Note dated", and "executed by ________ (Borrower), and payable to _______", and substituting "in effect on [date of closing]." The last sentence would then read: "For purposes of compliance with Section 223(a)(7)(A)(iv) of the National Housing Act, as amended, the Contract of Insurance regarding HUD Project No. [Old Project Number] is transferred to HUD Project No. [New Project Number], and said Contract of Insurance is hereby amended to reflect the terms, conditions and provisions of the National Housing Act, as amended, in effect on [date of closing]."

We agree that the syntax of the sentence is not particularly clear. The MF closing documents are subject to PRA renewal in 2014. In the interim, field counsel should follow the guidance provided in the recently posted response (set forth below).

We agree that the syntax of this sentence is not particularly clear; however because HUD’s insurance obligations are effective as of the date of endorsement of the note, the blank on the endorsement panel should state the date of the endorsement, not the date the note was
executed by the borrower. Please note that the blanks in the endorsement panel should be filled in by the HUD attorney at closing to ensure that the correct information is inserted. In other words, the “date of endorsement” is not the date of the Note (which may be dated the first day of the month or any other day prior to closing that is convenient for the parties), nor is it the date that the HUD personnel authorized to execute the endorsement panel physically signs the endorsement panel. Rather, it is the date of closing (which is the date that endorsement becomes effective because it is the date that HUD’s requirements have been sufficiently met so as to allow the handing over of the endorsed note).

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19. 8/09/2013                                                                                                                                                    I am working on a 223(a)(7) refinancing of a 223(f) loan. The 223(f) refinance took place more than five years ago in 2007. Paragraph (h) of the HUD Mortgage Note form states the following: "[To be included if the Loan is insured under Section 207 pursuant to Section 223(f) of the National Housing Act, as amended. If the Loan is NOT insured under Section 207 pursuant to Section 223(f) of the National Housing Act, as amended, subparagraph (H) should be stricken] (h) Notwithstanding any other provision of this Note to the contrary, this Note may not be prepaid either in whole or in part for a period of five (5) years from the date of endorsement of this Note, except in cases where the prior written approval of HUD is obtained and such written approval is expressly based on Borrower and HUD entering into a HUD-approved use agreement to maintain the Mortgaged Property as rental housing for the remainder of the specified five (5) year period." Since I am refinancing a 223(f) loan, does paragraph (h) get stricken or should it stay in the document? Since the original loan was more than five years ago, HUD has presumably satisfied its interest in keeping the property as rental housing for five years, so I don't think we need this language any more, but I would like your opinion.

The inclusion of Section 9(h) depends entirely on the section of the National Housing Act under which the “new” refinance loan is insured. Section 9(h) should remain in the document if the transaction in question is insured under 223(f). The language should be removed in any 223(a)(7) refinance of a 223(f).

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20.  2/06/2014
I am reviewing draft closing documents for a Section 223(f) loan and have the following concerns with the Promissory Note, form HUD-94001M (REV. 04/11). I am requesting your guidance on how I should proceed. In the Promissory Note, form HUD-94001M (REV. 04/11), at paragraph 9(h) under the division for loans that are to be insured under Section 223(f) of the National Housing Act, the preprinted language appears to be inconsistent with 12 U.S.C. 1715n Section 223(f)(3) and the MAP Guide at Section 3.9 G. The pertinent language in 94001M states: Notwithstanding any other provision of this Note to the contrary, this Note may not be prepaid either in whole or in part for a period of five (5) years from the date of endorsement of this Note, except in cases where the prior written approval of HUD is obtained and such written approval is expressly based on Borrower and HUD entering into a HUD-approved use agreement to maintain the Mortgaged Property as rental housing for the remainder of the specified five (5) year period. However, the National Housing Act permits prepayment under three other circumstances, which are not set out in 94001M. They are: (1) HUD determines that the conversion of the property to a cooperative or condominium ownership is sponsored by a bona fide resident organization representing the majority of households in the project; (2) HUD determines that continuation of the property as rental housing is unnecessary to assure adequate rental housing for low and moderate income residents of the community; or (3) HUD determines that continuation of the property as rental housing would have an undesirable and deleterious effect on the community.

Given the disparity between form HUD-94001M and the above statute and MAP Guide, should Counsel amend the form by requiring the addition of the above three options? Alternatively, would it be acceptable to insert the preceding language in the rider that details the prepayment penalties and lockout periods? Or, should the form be left “as is”, allowing adjustments to be made through a formal process? In response to a question to the Multifamily Document Reform Implementation Committee dated 12/28/2011, the Committee said, “Please note that the current language in Section 9 of the Note ... [is] in the process of being clarified and re-published.” Would the proposed clarification of Section 9 include adding the missing statutory language to 9(h)?

The Promissory Note, form HUD-94001M is not inconsistent with Section 223(f)(3) or MAP Guide Section 3.9 G. In order to simplify the Promissory Note, the findings and determinations required by the Secretary in order to accept a prepayment are not included in the form. However, HUD must still determine that the required factors listed in Section 223(f)(3) and MAP Guide Section 3.9 G exist prior to accepting a prepayment. Thank you for your question and the opportunity to provide clarification. We are considering additional language to avoid misunderstanding

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21. 3/05/2014
We respectfully request reconsideration of the response to Note FAQ #15 [see external website].  That FAQ and HUD’s response reads as follows:  “15. 9/6/2012  In the endorsement panel of the note for a refi (223(f) or 223(a)(7)), can the words "to the extent of advances approved by HUD" be stricken? The loan is disbursed in full at closing so there are no advances, but this language doesn't seem to hurt. What is HUD's position on striking this language?  Language in the closing documents cannot generally be stricken unless there is good cause to do so and the removal has been approved by the Associate General Counsel for Insured Housing. We have determined that it is not necessary to strike this language ("to the extent of advances") for 223(f) and 223(a)(7) transactions. If a particularized request is made for such a change it must be submitted in accordance with existing guidance.”

We request reconsideration because we maintain that the HUD response is clearly incorrect.  We base our conclusion on the following:
 
1. HUD does not approve advances in connection with refinancing loans.  Approval of advances is required for construction loans.  HUD approval of mortgage loan advances is provided by means of form HUD-92403, Application for Insurance of Advance of Mortgage Proceeds.  The text of that form evidences that it is applicable only for construction projects; and it is not included on HUD’s closing checklist forms for closings under Sections 223(a)(7) or 223(f).  In the hundreds of HUD-insured refinancing loans for which we have represented lenders or borrowers, HUD has not required approval of advances.

2. In further support of the above distinction, we note that the current Multifamily Note form (Rev. 04/11) references advances of principal only in Alternatives A and B (construction loan options) in Section 3 (“Payment of Principal and Interest”).  Alternative C (the “Non-Construction Loan payment provision”) in that section has no reference to advances.

3. For construction loans, HUD issues a “Commitment for Insurance of Advances” (form HUD-92432), whereby HUD agrees to provide final endorsement for insurance “to the extent of advances of mortgage proceeds approved by the Commissioner” (Section 5(c) of form HUD-92432).  In contrast, for loans insured under Sections 223(f), 223(a)(7), or 221(d) insurance upon completion, HUD issues a “Commitment to Insure Upon Completion.”  For construction loans, the evident purpose and effect of the “to the extent of advances approved by HUD” phrase in the Note is to limit HUD’s insurance obligation to the sum total of HUD-approved advances.  Until final closing, the approved advances (and HUD’s insurance obligation) will be less than the face amount of the Note.  For loans that involve insurance of advances, the actual amount of the insurance is filled in at final endorsement, and the amount specified in the final endorsement replaces the “to the extent of advances” limitation included in the initial endorsement.  If the sum total of HUD-approved advances at final closing is less than the face amount of the Note, HUD requires modification of the note to reduce the principal amount of the note correspondingly.

4. As is evident from the construction loan context, the phrase “to the extent of advances approved by HUD” establishes a limiting condition on HUD’s insurance obligation.  If HUD’s endorsement for a refinancing loan were to include that phrase, then without a specific HUD approval of an advance, HUD’s insurance obligation for the loan could be questioned.  Obviously, this is not the intended result.

5. Subsequent to the issuance of Note FAQ #15, HUD has addressed and clarified this matter in at least the following two instances:
     a. In the 2013 Lean form of Healthcare Facility Note, the endorsement panel of the form includes this text:  “[FOR USE ONLY WITH INITIAL CLOSING FOR CONSTRUCTION PROJECTS: to the extent of advances approved by HUD.]”  Also, Section 3 (“Payment of Principal and Interest”) of the Lean form contains the same distinctions as to references to advances as discussed above regarding the Multifamily form.
     b. The proposed updated form of Multifamily Note released for public comment in October 2013 provides differing endorsement panels based on the applicable National Housing Act section.  For Notes to be endorsed pursuant to Section 223(a)(7) or Section 223(f), the phrase “to the extent of advances approved by HUD” is not included.  That phrase is included only in the endorsement panel for New Construction/Substantial Rehabilitation loans.

6. The state-specific forms of notes required by HUD prior to the 2011 revised Multifamily documents provided for separate HUD signatures (i) at a construction loan initial closing (insuring “To the extent of advances approved by the Secretary”), and (ii) at a construction loan final closing (stating the total amount approved for insurance).  For refinancing closings, the first signature block was lined through.

The FHA-insured multifamily rental project closing documents are currently undergoing renewal pursuant to the Paperwork Reduction Act of 1995.  As part of that process, HUD has proposed a revision to the Note to provide separate signature blocks based on loan type. The proposed signature blocks for refinanced loans do not include the language in question.

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22. 3/06/2014                                                                                                                                                                     Why is there no room for the name of the borrower on the first page of the note? The debtor should be named as well as the lender (there is room for the lender’s name). Given that it is Borrower who is the obligor, and that the note is a multipage document, to refer to the debtor only as the “undersigned” and have the name revealed for the first time only on the signature page is a bit of a risk.

The Note, which is HUD Form HUD-94001M (Rev. 04/11), does not include room for the name of the Borrower on the first page. As part of the FHA-insured multifamily rental project closing documents are currently undergoing renewal pursuant to the Paperwork Reduction Act of 1995. As part of that process we have posted the current documents for comment. We will take your comment into consideration.

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23. 5/07/2014                                                                                                                                                                     I have a question on the override language for the Note rider. The MAP guide requires that the following language be included in the rider for transactions involving GNMA financing: "Notwithstanding any prepayment prohibition imposed and/or penalty required by this Note with respect to prepayments made prior to ... [enter first date on which prepayments may be made with a penalty of one percent or less] the indebtedness may be prepaid in part or in full on the last or first day of any calendar month without the consent of the mortgagee and without prepayment penalty if HUD determines that prepayment will avoid a mortgage insurance claim and is, therefore, in the best interests of the Federal Government." I have had an attorney request that the highlighted language be changed to simply the last day of any month because of the way GNMA deals work. Given that there doesn't appear to be much detriment to HUD in specifying only the last day (one day difference), is this change permissible?

First, it is important to clarify that the language the MAP Guide references in a rider has been
incorporated into the body of the Note at paragraph 9. Therefore, this language should not be
duplicated in a rider. The rider to the note must only include the lockout/pre-payment schedule, not
substantive provisions. However, this change is permissible. GNMA does not require that prepayments
are made on the either the first or last day of any calendar month. Regardless of when the prepayment
comes in, the issuer must pass through 1/12 of the annual interest for that month. The reporting
period in which the payment comes in determines when the payment goes to the investor.

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