Summary of HUD’s LEAN 232 Program E-mail Blast: Office of Residential Care Facilities (ORCF), October 31, 2012

by Pepper Hamilton LLP

[authors: Christine Waldmann Carmody and Blair L. Schiff]

In an effort to summarize the highlights of the LEAN E-mail Blasts that we receive, and rarely have time to review in a timely fashion, we at Pepper Hamilton are providing this quick synopsis of the latest LEAN update. Our aim is to provide pertinent information succinctly as a roadmap to the LEAN E-mail Blasts, not to replace them. We hope you find these summaries helpful.

New Section 232 Regulations Effective October 9, 2012

The new Section 232 regulations published September 7, 2012, became effective October 9. The new regulations cover many aspects of the 232 program, including physical, financial and operational matters, and though generally effective October 9, various provisions have different initial applicability dates as noted below. Below is a summary of some key provisions of the regulations noted in the LEAN Blast, for additional in-depth analysis, please see our complete summary.

Operator Financial Statements

The new provision requiring operators to submit quarterly/year-to-date financial statements to the FHA lender and HUD (24 CFR 5.801(a)(6) and (d)(4)) is not yet applicable and will not be required until HUD announces (via Federal Register notice) how the financial reports are to be submitted. HUD anticipates announcing the submission method in 2013. Even then, this provision will apply only with respect to fiscal years commencing at least 60 days after the announcement. When the applicability date is ultimately reached, however, this provision will apply both to existing and future 232 projects.

REAC Physical Inspections

The new REAC regulation, which limits the inspections required for skilled nursing facilities (SNFs) (24 CFR 200.855), is now applicable. REAC will no longer routinely perform physical inspections on skilled nursing facilities (though HUD can direct on a case-by-case basis that one be conducted). SNFs that have some non-skilled nursing units, but are predominantly providing skilled nursing care, are also excluded from the REAC inspections.

In implementing this provision as expeditiously as possible, HUD is halting the scheduling of routine inspections on such facilities. Additionally, HUD has directed the cancellation of:

a) inspections scheduled prior to November 8, where the prior REAC inspection resulted in a score of 80 or above, and
b) inspections already scheduled to occur on or after November 9, unless the prior REAC score was below 60.

The provision also gives HUD the authority to determine that other (non-SNF) projects in a particular jurisdiction do not need REAC inspections, if HUD finds that a particular jurisdiction provides adequate inspections with readily available results. Further information on implementation will be announced in the future.

Purchase of Goods and Services

The new regulations imposing a reasonableness standard when purchasing goods and services (24 CFR 232.1007) are now applicable, and apply to all existing and future 232 projects. While this requirement had not previously been set forth in the regulations, it is not a departure from longstanding HUD expectations or from standard industry practice.

Prohibition on Operator Withdrawing Funds

There is a new regulation prohibiting the operator from withdrawing funds if it fails to timely submit a quarterly/year-to-date financial statement or if that statement shows negative “working capital” (24 CFR 232.1013(b)). This regulation applies only to transactions for which a firm commitment is issued on or after April 9, 2013.

Prompt Notification of Circumstances Placing the Value of the Security at Risk

Operators must promptly provide HUD and the FHA lender with notification of any event that has placed the license, a provider funding source, and/or the ability to admit new residents at risk, and any responses. This provision (24 CFR 232.1015) is now applicable for all existing and future 232 projects. Only violations of “g” level (or its equivalent) or greater, which result in an imposition of remedy level greater than CMS Remedy Category 1, or its equivalent (pursuant to CMS State Operations Manual, Chapter 7) must be reported.

Eligibility of Bridge Loan Financed Indebtedness

A bridge loan is a short-term loan that spans the gap between two long-term loans. In many instances, we see bridge loans used when the FHA-insured loan will not be in place prior to the maturity of a facility’s current debt. Bridge loans are permitted as eligible indebtedness in the Section 232/223(f) program as long as the original indebtedness meets eligible debt requirements (please see the April 10, 2009 E-mail Blast) and the bridge was not used to artificially increase the mortgage, circumvent program intent or to facilitate equity cash-out.

As established in the April 10, 2009 E-mail Blast, and reaffirmed in the March 30, 2012 E-mail Blast, transactions involving any identity of interest between the borrower and the FHA lender are not permitted by Section 232. Similarly reaffirmed on March 30, 2012, when either the lender of the original indebtedness or the bridge lender has any identity of interest with the borrower, the debt must season five years before it can be refinanced under Section 232/223(f). When there is any identity of interest between the FHA lender and the bridge lender, the original indebtedness must meet eligible debt requirements and any identity of interest must be disclosed for HUD analysis.

New Resources Given to the ‘Other Queue’

For a period of 60 days, some ORCF underwriters were pulled from reviewing applications to review industry comments on the new forms being developed by ORCF for publication. Now that the forms review process is complete, five ORCF underwriters and five ORCF appraisers have been assigned to review the applications in the “Other Queue.” By allocating these resources to the Other Queue, ORCF will be able to reduce the queue time for these applications.

New Construction Processing – Applications with Major Deficiencies

While prescreening new construction applications, if ORCF identifies any major deficiencies, it will contact the lender to advise them of those deficiencies. The firm application will then be placed on long-term hold until the lender has provided sufficient evidence or explanation to resolve the major deficiencies. Firm applications that are received on or after November 1, 2012, that are placed on long-term hold due to major deficiencies will be placed at the end of the queue based on the date the lender provides an acceptable response to ORCF. By managing firm applications for new construction projects in this order, ORCF will provide the fastest processing to lenders with complete applications.

Lender Performance Measures (Underwriting)

ORCF is collecting data based on Underwriter Reviews of applications. Applications are evaluated based on six general criteria: (1) Mathematical Calculations; (2) Quality Control; (3) Responsiveness; (4) Due Diligence; (5) Programmatic/Legal Issues; and (6) Third-Party Reports and Assessments. Any significant problems in these areas that lead to delay in underwriting review are noted by the ORCF underwriter. Data is collected for every application and is then sorted by lender and will be shared with individual lenders on a quarterly basis. While ORCF is coordinating with the Lender Approval and Monitoring Division, confirm with Mary Walsh ( if you wish to receive the quarterly data report.

Upcoming Team TSI/HUD Training Webinar

As mentioned in the January 25, 2011 E-mail Blast, HUD has contracted with Team TSI to provide a Web site that contains all the survey reports for HUD’s 232 existing nursing home portfolio. ORCF feels that this information is crucial in understanding the quality of care provided to the residents. This service is free for all lenders to access their existing FHA-insured portfolio. Team TSI/HUD will be providing a training webinar on the use of the Team TSI Corporation Web portal on Friday, December 14, 2012, from 1:00 p.m. - 2:00 p.m. CST. To register for this session visit

The Closing Corner

Early Commencement Shortfall Process

ORCF-approved Early Commencement construction transactions may over-estimate certain line items since approval is based on the estimated replacement cost. Therefore, ORCF is offering FHA lenders the option to request amendments to firm commitments that more accurately reflect estimated costs in the determination of the maximum mortgage amount (Criteria 12 of the HUD-92264A). The firm commitment amendment request letter should include the estimated and certified actual costs as well as a revised HUD-92264A. A sample certification is located on ORCF’s Web site under “Sample Closing Documents.”

In addition, the most common and significant cost savings in early commencement transactions involves interest and MIP payments, since the borrower is not paying (HUD-insured) interest payments during the early commencement period. The FHA lender should estimate the remaining interest payments for the number of months (plus two months) that will remain in the construction schedule at the time of Initial Closing, and attach that calculation (and any explanation) to the Shortfall Certification. The lender should not revise the HUD-92264HCF as part of the amendment request.

Reminder: Identify Common Ownership and Portfolios at Application Submission

As stated and defined in the November 18, 2011 E-mail Blast, and May 31, 2012 E-mail Blast, if two (or more) projects have any degree of common ownership, indicate that on the Certification for Electronic Submittal and/or preferably let Rasheedah Dix know when you submit your FHA # request. Remember, this is part of an 18-month period; you may have to look at what already closed or what you will submit in the future.

Lenders should identify the common ownership as early as possible, preferably when applying for the FHA number but also when submitting an application. Common ownership should be identified on the Principal of Mortgagor Consolidated Certification as well as the Certification for Submission of Electronic Firm Application. This identification does not determine master lease or portfolio review requirements; it is simply to ensure ORCF properly names, tracks and assigns the projects to one underwriter and attorney.

Post-Closing Reminder: The Transaccess Process

As mentioned in the November 18, 2011 E-mail Blast, ORCF introduced the Transaccess Process to obtain critical documents for each project following closing. These critical documents are essential for the account executives to service the new loans. While it has not become standard operating procedure for all lenders to submit the documents, we strongly encourage all to provide an electronic version of the closing documents within 30 days of the closing of the project to the closer.

Additional Reminders for 223f/223(a)(7) Closings

Extension Requests

Firm Commitments may be extended for a 60-day period for 223(f) loans or a 90-day period for 223(a)(7) loans, provided that processing and underwriting conclusions are current at the time of any extension. The lender’s request to amend the Firm Commitment must include the reason for the delay and justify how the delay can be solved during the extension. Amendments must also include the following MAP Guide 11.2(G) statement: “The requested delay is not likely to change significantly the underwriting data on which the commitment was based or to undermine the feasibility of the project due to a change in the market, inflation, or other factors affecting cost.” The first request to extend may be approved by the closer. The subsequent request must go to the closer, underwriter and project WLM for approval.

Interest Rate Premium and Sources of Cash on Closing Statements

Please remember that the full amount of the interest rate premium and sources of any cash to the borrower are required to be shown on closing statements.

Proposed Forms Should Not Be Used at This Time

The new documents proposed this summer have not gone into effect and should not be used!

New Construction Final Closing Timeframes

Please keep in mind the following key time periods when planning for Final Closing of your New Construction project:



Construction Complete Date

Construction Completion

The Final Trip Date (date of inspection) is considered the Construction Completion Date.

Up to 60 days from date of Construction Completion/Final Trip Report

Cost Cut-Off:

The Mortgagor has up to 60 days from the date of the Final Trip Report/Construction Completion to determine the Cost Cut-off Date for development soft costs.

Up to 60 days from Cost Cut-Off Date

Cost Certification Package:

Lender to submit the Cost Certification Package (see required documents for package in E-mail Update of 2/2/12, and supplemental information in 11/18/11, 1/6/12, and 5/31/12)

**If Lender is not able to meet this deadline, an extension request should be sent to the Closing Coordinator.

Up to 30 days from receipt of Cost Certification Package

ORCF Review of Cost Certification Package:

Maximum Insurable Mortgage Letter will be issued once Cost Certification Package is approved.

Up to 30 days from issuance of Maximum Insurable Mortgage Letter

Final Closing Package:

Lender to submit the Final Closing Package (see required documents for package in E-mail Update of 6/27/12)

**If Lender is not able to meet this deadline, an extension request should be sent to Closing Coordinator.

Up to 30 days from receipt of Final Closing Package

ORCF/OGC Review of Final Closing Package and Final Closing Date Set

Incomplete packages or delays in submission of required documents will cause delays in reaching Final Closing.

Final Thoughts and Tidbits

The most recent update to ORCF’s FAQs was on October 17, 2012. ORCF’s FAQs are a valuable reference resource when looking for quick answers. The updated FAQs can be found online at

All FY 2012 LEAN closings are now posted on and can be found online at All LEAN closings (FY 2010 – FY 2012) can be found online at



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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