Summary of HUD’s LEAN 232 Program E-mail Blast: Office of Residential Care Facilities (ORCF), August 29, 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.

Mortgage Insurance Premium (MIP) Update

Effective October 1, 2012 (FY 2013), all firm commitments issued for 232 projects will have an increase in the annual Mortgage Insurance Premium (MIP). Firm commitment applications (“Applications”) that were in the queue prior to June 1, 2012, will be grandfathered under the previous (FY 2012) MIP rates. The new rate information is attached and available here: MIP Change for FY 2013 FR-5634-N-02.

ORCF still does not regulate the MIP collected by Lenders, and for refinances there is no change to the current MIP rates.

For new construction, rehabilitation, 241a and blended rate transactions, effective October 1, 2012, the lender must provide a check for one year of MIP at initial closing. Also, the MIP should be calculated on a per diem basis as required for cost certification. Lenders may request in writing funds from the Working Capital account to pay the year two MIP, if the project has not yet reached final endorsement.

Additional questions on MIP (including those regarding billing errors to borrowers) should be sent to Lean Thinking at

Fixed Monthly Replacement Reserve Deposit

Due to concerns regarding a property’s ability to absorb increases in replacement reserve deposits in later years, for applications submitted on or after September 30, 2012, the replacement reserve schedule/analysis must use annual replacement reserve deposits that are fixed over the 15-year term of the replacement reserve schedule/analysis.

Guidance on Floodways

ORCF has been rejecting Applications for projects with floodways or coastal hazard areas located on a property’s site. The decisions were based on a prohibition against mortgage insurance in the situations cited in 24 CFR 55.1(c). Once an Application for a site containing a floodway has been submitted, the Application may not be accepted unless the floodway portion is excluded from the parcel or is deemed incidental to the site in accordance with exceptions noted in 24 CFR 55.12(c)(6).

The exception states that floodways may only be part of the insured site so long as all floodplain areas (including the 500-year floodplain for critical actions) are considered to be incidental portions of the site. Therefore, any proposed construction and landscaping cannot occupy or modify the relevant floodplain, appropriate provision must be made for site drainage, and a covenant must be placed of record. Due to the constraint that activities must “not occupy or modify” the floodplain, the floodplain cannot be utilized in the development or support of any project activity, except as passive open or green space. Open space is a portion of a development site that is permanently set aside for public or private use and will not be developed. Green space is considered to be undeveloped land or land restored to its natural state.

When invoking the “incidental portion” exception at 24 CFR 55.12(c)(6), a protective covenant, or comparable restriction, must be placed of record, to run with the land, and to provide for permanent preservation of the floodplain. A restriction that is contained in a document that would expire at the conclusion of the HUD-insured mortgage does not meet this requirement.

In considering the safety of the residents, offsite floodways and other flood hazards will be evaluated in terms of separation distance, elevation differences, and the nature of the hazard in question. Unacceptable proximity to hazards may result in rejection of the application. Pre-submission rulings can be requested through Lean Thinking at

Site Visit Inspections by LEAN Approved Underwriter for 232/223(a)(7)s and 223(f)s

A LEAN approved underwriter, who is not the LEAN underwriter of record, is permitted to perform the site visit so long as the site inspection report is reviewed and certified/signed by the underwriter of record.

Where to Send Application Fees

Pre-Commitment Application fees are due to Mike Luke in Minneapolis:

    Mike Luke
    HUD Minneapolis Field Office
    920 2nd Ave S, Suite 1300
    Minneapolis, MN 55402

Any additional fees due after the Firm Commitment has been issued shall be sent to Mike Moe Lawassani in the San Francisco office:

    Mike Moe Lawassani
    U.S. Department of HUD - San Francisco Field Office
    600 Harrison Street, 3rd Floor
    San Francisco, CA 94107

Changes to the Legal Forms

Don’t change the forms without OHP and OGC approval! In the event changes are requested, redline comparisons to the forms and explanations as to the necessity of the change are required.



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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