Section 108 Loan Guarantee Program: Announcement of Fee To Cover Credit Subsidy Costs for FY 2021

 
CONTENT
Federal Register, Volume 85 Issue 166 (Wednesday, August 26, 2020)
[Federal Register Volume 85, Number 166 (Wednesday, August 26, 2020)]
[Rules and Regulations]
[Pages 52479-52481]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18392]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 570
[Docket No. FR-6208-N-01]
Section 108 Loan Guarantee Program: Announcement of Fee To Cover
Credit Subsidy Costs for FY 2021
AGENCY: Office of the Assistant Secretary for Community Planning and
Development, HUD.
ACTION: Announcement of fee.
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SUMMARY: This document announces the fee that HUD will collect from
borrowers of loans guaranteed under HUD's Section 108 Loan Guarantee
Program (Section 108 Program) to offset the credit subsidy costs of the
guaranteed loans pursuant to commitments awarded in Fiscal Year 2021.
DATES: Applicability date: October 1, 2020.
FOR FURTHER INFORMATION CONTACT: Paul Webster, Director, Financial
Management Division, Office of Block Grant Assistance, Office of
Community Planning and Development, U.S. Department of Housing and
Urban Development, 451 7th Street SW, Room 7282, Washington, DC 20410;
telephone number 202-402-4563 (this is not a toll-free number).
Individuals with speech or hearing impairments may access this number
through TTY by calling the toll-free Federal Relay Service at 800-877-
8339. FAX inquiries (but not comments) may be sent to Mr. Webster at
202-708-1798 (this is not a toll-free number).
SUPPLEMENTARY INFORMATION:
[[Page 52480]]
I. Background
 The Transportation, Housing and Urban Development, and Related
Agencies Appropriations Act, 2015 (division K of Pub. L. 113-235,
approved December 16, 2014) (2015 Appropriations Act) provided that
``the Secretary shall collect fees from borrowers . . . to result in a
credit subsidy cost of zero for guaranteeing'' Section 108 loans.
Identical language was continued or included in the Department's
continuing resolutions and appropriations acts authorizing HUD to issue
Section 108 loan guarantees during Fiscal Years (FYs) 2016, 2017, 2018,
2019, and 2020. The Fiscal Year (FY) 2021 HUD appropriations bill under
consideration \1\ also has identical language regarding the fees and
credit subsidy cost for the Section 108 Program.
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 \1\ Title II of H.R. 7616, 116th Cong., under the heading
``Community Development Loan Guarantees Program Account.''
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 On November 3, 2015, HUD published a final rule (80 FR 67626) that
amended the Section 108 Program regulations at 24 CFR part 570 to
establish additional procedures, including procedures for announcing
the amount of the fee each fiscal year when HUD is required to offset
the credit subsidy costs to the Federal Government to guarantee Section
108 loans. For FYs 2016, 2017, 2018, 2019, and 2020 HUD published
notifications to set the fees.\2\
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 \2\ 80 FR 67634 (November 3, 2015), 81 FR 68297 (October 4,
2016), 82 FR 44518 (September 25, 2017), 83 FR 50257 (October 5,
2018), and 84 FR 35299 (July 23, 2019) respectively.
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II. FY 2021 Fee: 2.15 Percent of the Principal Amount of the Loan
 This document sets the fee for Section 108 loan disbursements under
loan guarantee commitments awarded for FY 2021 at 2.15 percent of the
principal amount of the loan. HUD will collect this fee from borrowers
of loans guaranteed under the Section 108 Program to offset the credit
subsidy costs of the guaranteed loans pursuant to commitments awarded
in FY 2021. For this fee announcement, HUD is not changing the
underlying assumptions or creating new considerations for borrowers.
The calculation of the FY 2021 fee uses a similar calculation model as
the FY 2016, FY 2017, FY 2018, FY 2019, and FY 2020 fee notifications,
but incorporates updated information regarding the composition of the
Section 108 portfolio and the timing of the estimated future cash flows
for defaults and recoveries. The calculation of the fee is also
affected by the discount rates required to be used by HUD when
calculating the present value of the future cash flows as part of the
Federal budget process.
 As described in 24 CFR 570.712(b), HUD's credit subsidy calculation
is based on the amount required to reduce the credit subsidy cost to
the Federal Government associated with making a Section 108 loan
guarantee to the amount established by applicable appropriation acts.
As a result, HUD's credit subsidy cost calculations incorporated
assumptions based on: (1) Data on default frequency for municipal debt
where such debt is comparable to loans in the Section 108 loan
portfolio; (2) data on recovery rates on collateral security for
comparable municipal debt; (3) the expected composition of the Section
108 portfolio by end users of the guaranteed loan funds (e.g., third-
party borrowers and public entities); and (4) other factors that HUD
determined were relevant to this calculation (e.g., assumptions as to
loan disbursement and repayment patterns).
 Taking these factors into consideration, HUD determined that the
fee for disbursements made under loan guarantee commitments awarded in
FY 2021 will be 2.15 percent, which will be applied only at the time of
loan disbursements. Note that future notifications may provide for a
combination of upfront and periodic fees for loan guarantee commitments
awarded in future fiscal years but, if so, will provide the public an
opportunity to comment if appropriate under 24 CFR 570.712(b)(2).
 The expected cost of a Section 108 loan guarantee is difficult to
estimate using historical program data because there have been no
defaults in the history of the program that required HUD to invoke its
full faith and credit guarantee or use the credit subsidy reserved each
year for future losses.\3\ This is due to a variety of factors,
including the availability of Community Development Block Grant (CDBG)
funds as security for HUD's guarantee as provided in 24 CFR 570.705(b).
As authorized by Section 108 of the Housing and Community Development
Act of 1974, as amended (42 U.S.C. 5308), borrowers may make payments
on Section 108 loans using CDBG grant funds. Borrowers may also make
Section 108 loan payments from other anticipated sources but continue
to have CDBG funds available should they encounter shortfalls in the
anticipated repayment source. Despite the program's history of no
defaults, Federal credit budgeting principles require that the
availability of CDBG funds to repay the guaranteed loans cannot be
assumed in the development of the credit subsidy cost estimate (see 80
FR 67629, November 3, 2015). Thus, the estimate must incorporate the
risk that alternative sources are used to repay the guaranteed loan in
lieu of CDBG funds, and that those sources may be insufficient. Based
on the rate that CDBG funds are used annually for repayment of loan
guarantees, HUD's calculation of the credit subsidy cost must
acknowledge the possibility of future defaults if those CDBG funds were
not available. The fee of 2.15 percent of the principal amount of the
loan will offset the expected cost to the Federal Government due to
default, financing costs, and other relevant factors. To arrive at this
measure, HUD analyzed data on comparable municipal debt over an
extended period. The estimated rate is based on the default and
recovery rates for general purpose municipal debt and industrial
development bonds. The cumulative default rates on industrial
development bonds were higher than the default rates on general purpose
municipal debt during the period from which the data were taken. These
two subsectors of municipal debt were chosen because their purposes and
loan terms most closely resemble those of Section 108 guaranteed loans.
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 \3\ U.S. Department of Housing and Urban Development, Study of
HUD's Section 108 Loan Guarantee Program, (prepared by Econometrica,
Inc. and The Urban Institute), September 2012, at pages 73-74. This
fact has not changed since the issuance of this report.
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 In this regard, Section 108 guaranteed loans can be broken down
into two categories: (1) Loans that finance public infrastructure and
activities to support subsidized housing (other than financing new
construction) and (2) other development projects (e.g., retail,
commercial, industrial). The 2.15 percent fee was derived by weighting
the default and recovery data for general purpose municipal debt and
the data for industrial development bonds according to the expected
composition of the Section 108 portfolio by corresponding project type.
Based on the dollar amount of Section 108 loan guarantee commitments
awarded from FY 2015 through FY 2019, HUD expects that 44 percent of
the Section 108 portfolio will be similar to general purpose municipal
debt and 56 percent of the portfolio will be similar to industrial
development bonds. In setting the fee at 2.15 percent of the principal
amount of the guaranteed loan, HUD expects that the amount generated
will fully offset the cost to the Federal Government associated with
making guarantee
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commitments awarded in FY 2021. Note that the FY 2021 fee represents a
0.15 percent increase from the FY 2020 fee of 2.00 percent.
 This document establishes a rate that does not constitute a
development decision that affects the physical condition of specific
project areas or building sites. Accordingly, under 24 CFR 50.19(c)(6),
this document is categorically excluded from environmental review under
the National Environmental Policy Act of 1969 (42 U.S.C. 4321).
 Dated: August 18, 2020.
John Gibbs,
Acting Assistant Secretary for Community Planning and Development.
[FR Doc. 2020-18392 Filed 8-25-20; 8:45 am]
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