upon completion) subject to regulation under a State or local rent control law, but for an exclusion contained in the State or local law based upon regulation of the project rents by the Commissioner; and

(C) The exclusion continues in effect, so that authorizing the mortgagor to determine rents would have the effect of subjecting the project to regulation under the State or local rent control law.

This paragraph (iv) shall not apply to any mortgage insured under this Part, the proceeds of which were used to refinance a mortgage insured under 24 CFR Part 220 or 221 for which the firm commitment to insure under such Part 220 or 221 was issued on or after June 1, 1983.

(6) Reasonable and moderate rental charges-mortgages insured on or after November 30, 1983. With respect to projects on which rents are deregulated as provided in paragraph (5) of this section, "reasonable" and "moderate" rental charges for purposes of section 207(b)(2) of the National Housing Act are determinable by reference to market rentals in the area.

(7) Certain refinanced projects. Rents on refinanced projects insured under section 207 of the National Housing Act pursuant to section 223(f) of that Act that have a Rent Supplement contract under Part 215 of this title, or that receive assistance under Part 236 of this title, shall be determined in accordance with § 221.530(a)(2) or § 236.55, as appropriate. The mortgagor may charge tenants for facilities or services offered by the project only as HUD's administrative instructions permit.

(8) Rent control-all mortgages. Any State or local law, ordinance, or regulation regulating the rents of projects subject to this section may be preempted only as provided in Part 246 of this chapter. HUD will determine the maximum rents that may be charged following any such preemption action using the method outlined in paragraph (e)(2)(ii)(A) of this section.

(9) Regulation of charges for certain projects. (i) The Commissioner will regulate, as provided in paragraph (e)(9)(ii) of this section, the charges that a mortgagor may make for ac

or

commodations (rents), facilities, services offered by a project insured under this part, if:

(A) As of December 1, 1987, the mortgagor and the Commissioner had not executed (or the mortgagor had not filed a written request with the Commissioner to enter into) an amendment to the regulatory agreement to the project, under which the mortgagor could elect to determine the maximum project rents on the basis of the following formulae:

(1) The alternative formula contained in paragraph (e)(2)(ii) of this section for mortgages insured pursuant to a firm commitment to insure issued before June 1, 1983.

(2) The alternative formula contained in paragraph (e)(2)(iii) of this section for mortgages insured before November 30, 1983, where the project contained units assisted under 24 CFR Part 886 (Section 8 Housing Assistance Payments Program-Special Allocations).

(B) (1) As of December 1, 1987, the project was receiving assistance under a Section 8 Housing Assistance Payments (HAP) Contract under Part 880 (Section 8 Housing Assistance Payments Program for New Construction), Part 881 (Section 8 Housing Assistance Payment Program for Substantial Rehabilitation), Part 882, Subparts D and E (Section 8 Housing Assistance Payments Program for Moderate Rehabilitation), Part 883 (Section 8 Housing Assistance Payments Program-State Housing Agencies), or Part 886 (Section 8 Housing Assistance Payments Program-Special Allocations) of this title; or

(2) Not less than 50 percent of the units in the project are occupied by lower income families (as defined in 24 CFR 813.102), based on tenant income data supplied to the Commissioner by the project owner as part of a submission to amend the regulatory agreement to use the alternative formulae for determining project rentals under paragraph (e)(2) (ii) or (iii) of this section.

(ii) For projects that meet the criteria in paragraph (e)(9)(i) of this section, the mortgagor may make no charges for the accommodations (rents), facilities, or services offered by

the project in excess of those that the Commissioner approves in writing before the project opened for rental. In approving these charges and later rent adjustments, the Commissioner will give consideration to providing for rental income necessary to maintain the economic soundness of the project and a reasonable return on investment, consistent with reasonable rents to tenants. The Commissioner will approve these charges and later rent adjustments on the same basis and in the same manner they were approved immediately before June 1, 1983, except that mortgagors may use the forwardbased budgeting provision in paragraph (e)(2)(ii)(A) of this section for purposes of determining project rentals.

(iii) Any mortgagor that is subject to this paragraph (e)(9) and that determined project rentals on the basis of the alternative formulae contained in paragraph (e)(2) (ii) or (iii) of this section must refund the difference (if any) between the charges that project tenants actually paid for accommodations (rents), services, and facilities after December 1, 1987, and the charges that project tenants would have paid for such items for the same period under paragraph (e)(9)(ii) of this section.

(f) Methods of operation. (1) [Reserved]

(2) The mortgagor shall maintain its project, the grounds, buildings, and equipment appurtenant thereto, in good repair and will promptly complete necessary repairs and maintenance as required by the Commission

er.

(3)(i) In all projects, except those involving rehabilitation where the mortgage does not exceed $200,000, a fund for replacements shall be established and maintained with the mortgagee. The amount and type of such fund and the conditions under which it shall be accumulated, replenished, and used, shall be specified in the charter, trust agreement, or regulatory agreement.

(ii) For projects insured under this part which are also assisted under Part 880 (Section 8-New Construction), Part 881 (Section 8-Substantial Rehabilitation) or Part 883 (Section

8-State Housing Agencies), the replacement reserve provisions of the applicable Section 8 regulation, contained at §§ 880.602, 881.602 or § 883.703 respectively, shall apply; except that for partially-assisted Section 8 projects, as defined in Part 880, 881 or 883, whichever is applicable, paragraph (f)(3)(i) of this section shall apply.

(4) The mortgagor, its property, equipment, buildings, plans, offices, apparatus, devices, books, contracts, records, documents, and papers shall be subject to inspection and examination by the Commissioner or his duly authorized agent at all reasonable times.

(5) The mortgagor shall execute and deliver to the Commissioner a certificate that the books and accounts of the mortgagor will be established and maintained in a manner satisfactory to the Commissioner on the date the certificate is executed. Such certificate shall be to the effect that so long as the mortgage is insured or held by the Commissioner the mortgagor's books and accounts will be kept in accordance with the requirements of the Commissioner; will be in such form as to permit a speedy and effective audit and as may otherwise be prescribed by the Commissioner; will be maintained for such periods of time as may be prescribed by the Commissioner, and will be available to the Commissioner and to the Comptroller General of the United States for such examination and audits as they may desire to make. The mortgagor shall file with the Commissioner and the mortgagee the following reports verified by the signature of such officers of the mortgagor as the Commissioner may designate and in such form as prescribed by the Commissioner:

(i) Monthly occupancy reports, when required by the Commissioner;

(ii) [Reserved]

(iii) Complete annual financial reports based upon examinations of the books and records of the mortgagor, prepared in accordance with the requirements of the Commissioner, certified to by an officer of the mortgagor and, when required by the Commissioner, prepared and certified by a Certified Public Accountant (or other

agreement.

(iv) Specific answers to questions upon which information is desired from time to time relative to the actual cost of construction, the disposition of mortgage funds, the operation and condition of the property and the status of the insured mortgage;

(v) Properly certified copies of minutes of meetings of directors, officers, stockholders, shareholders, or beneficiaries.

(g) Mortgagor's equity investment(1) Amount and deposit. Unless it can be established to the satisfaction of the Commissioner, prior to the final endorsement of the mortgage for insurance, that the mortgagor has an investment in the project, represented by cash expenditures, in an amount equal to 3 percent of the total cost of the project as certified by the mortgagor and approved by the Commissioner, there shall be deposited in a special fund an amount equal to the difference between such 3 percent and the amount of any such investment for necessary expenses incident to the completion of the project. Disbursements from any such fund, prior to three years from the date of the final or initial-final endorsement of the mortgage for insurance, may be made only with the prior written approval of the Commissioner.

(2) Cutoff date. The provisions of paragraph (g)(1) of this section shall be applicable only to those mortgages which have received final endorsement on or before November 15, 1962.

(h) Advance amortization. (1) If prior to the beginning of amortization net income, as defined by the Commissioner, is received as a result of the rental of the mortgaged property, such net income, to the extent determined by the Commissioner, shall be applied in one or more of the following ways:

(i) To advance amortization.

(ii) To offset the cost of approved capital improvements.

(iii) To be deposited in the reserve fund for replacement and to be held as a reserve in addition to the monthly

(2) The provisions of paragraph (h)(1) of this section shall be applicable to commitments issued on or after December 3, 1963, and to commitments outstanding on that date where the mortgage has not received final endorsement. The provisions of paragraph (h)(1) of this section shall not be applicable to a project involving rehabilitation where the mortgage does not exceed $200,000.

(Approved by the Office of Management and Budget under control numbers 25020314 and 2502-0324)

[36 FR 24537, Dec. 22, 1971, as amended at 41 FR 41516, Sept. 22, 1976; 45 FR 50731, 50733, July 31, 1980; 48 FR 16673, Apr. 19, 1983; 48 FR 35391, Aug. 4, 1983; 48 FR 44070, Sept. 27, 1983; 49 FR 6715, Feb. 23, 1984; 49 FR 12215, Mar. 29, 1984; 49 FR 45126, Nov. 15, 1984; 51 FR 20270, June 4, 1986; 53 FR 15817, May 4, 1988]

§ 207.19a Insured advances for building components stored off-site.

(a) Building components. In insured advances for building components stored off-site, the term building component shall mean any manufactured or pre-assembled part of a structure which the Commissioner has specifically identified for incorporation into the property and has designated for off-site storage because it is of such size or weight that: (1) Storage of the number of components required for timely construction progress at the construction site is impractical, or (2) weather damage or other adverse conditions prevailing at the construction site would make storage at the site impractical or unduly costly.

(b) Storage. (1) An insured advance may be made for up to 90 percent of the invoice value (to exclude costs of transportation and storage) of the building components stored off-site if the components are stored at a location approved by the mortgagee and the Commissioner.

(2) Each building component shall be adequately marked so as to be readily identifiable in the inventory of the off-site location. It shall be kept together with all other building components of the same manufacturer intended for use in the same project for

which insured advances have been made and separate and apart from similar units not for use in the project.

(3) Storage costs, if any, shall be borne by the contractor.

(c) Responsibility for transportation, storage and insurance of off-site building components. The general contractor of the insured mortgaged property shall have the responsibility for: (1) Insuring the components in the name of the mortgagor while in transit and storage; and (2) delivering or contracting for the delivery of the components to the storage area and to the construction site, including payment of freight.

(d) Advances. (1) Before an advance for a building component stored offsite is insured: (i) The mortgagor shall (A) obtain a bill of sale for the component, (B) give the mortgagee a security agreement, and (C) file a financing statement in accordance with the Uniform Commercial Code, and (ii) the mortgagee shall warrant to the Commissioner that the security instruments are a first lien on the building components covered by the instruments except for such other liens or encumbrances as may be approved by the Commissioner.

(2) Before each advance for building components stored off-site is insured, the mortgagor's architect shall certify to the Commissioner that the components, in their intended use, comply with HUD-approved contract plans and specifications. Under those circumstances permitted by the Commissioner in which there is no architect, compliance with the HUD-approved contract plans and specifications shall be determined by the Commissioner.

(3) Advances may be made only for components stored off-site in a quantity required to permit uninterrupted installation at the site.

(4) At no time shall the invoice value of building components being stored off-site, for which advances have been insured, represent more than 25 percent of the total estimated construction costs for the insured mortgaged project as specified in the construction contract. Notwithstanding the preceding sentence and other regulatory requirements that set bonding requirements, the percentage of total estimat

ed construction costs insured by advances under this section may exceed 25 percent but not 50 percent if the mortgagor furnishes assurance of completion in the form of a corporate surety bond for the payment and performance each in the amount of 100 percent of the amount of the construction contract. In no event will insurance of components stored off-site be made in the absence of a payment and performance bond.

(5) No single advance which is to be insured shall be in an amount less than ten thousand ($10,000) dollars.

[44 FR 8194, Feb. 8, 1979, as amended at 48 FR 15897, Apr. 13, 1983]

§ 207.20 Occupancy requirements.

(a) Nondiscrimination against families with children. Except in the case of a mortgage with respect to a manufactured home park designed exclusively for occupancy by elderly persons, the mortgagor shall certify under oath to the Commissioner that:

(1) In selecting tenants for the project covered by the mortgage, the mortgagor will not discriminate against any family by reason of the fact that there are children in the family; and

(2) The mortgagor will not sell the project while the mortgage insurance is in effect unless the purchaser also so certifies.

(b) Transient or hotel purposes. The mortgagor shall certify under oath that, so long as the mortgage is insured by the Commissioner, the mortgagor will not rent, permit the rental or permit the offering for rental of the housing, or any part thereof, covered by such mortgage for transient or hotel purposes. For the purpose of this certificate, the term rental for transient or hotel purposes shall mean: (1) Rental for any period less than 30 days, or (2) any rental, if the occupants of the housing accommodations are provided customary hotel services such as room service for food and beverages, maid service, furnishing and laundering of linens, and bellboy service.

[36 FR 24573, Dec. 22, 1971, as amended at 49 FR 12697, Mar. 30, 1984]

8 207.21 Racial discrimination prohibited.

Any contract or subcontract executed for the performance of construction of the project shall contain a provision that there shall be no discrimination against any employee, or applicant for employment because of race, color, creed, or national origin. Where the mortgagor is the general contractor, the building loan agreement shall contain the above provisions.

ELIGIBLE MORTGAGEES

8 207.22 Qualification of lenders.

The provisions of §§ 203.1 to 203.4 and 203.6 to 203.9 of this chapter shall govern the eligibility, qualifications and requirements of mortgages under this subpart.

PROPERTY REQUIREMENTS

8 207.23 Eligibility of property.

(a) The mortgage, to be eligible for insurance, shall be on property located in a State, Puerto Rico, the District of Columbia, Guam, the Trust Territory of the Pacific Islands, American Samoa, or the Virgin Islands. The mortgage shall be on real estate held: (1) In fee simple; or

(2) On the interest of the lessee under a lease for not less than ninetynine years which is renewable; or

(3) Under a lease having a period of not less than seventy-five years to run from the date the mortgage is executed; or

(4) Under a lease executed by a governmental agency, an Indian, an Indian tribe, or such other lessor as the Commissioner may approve for the maximum term consistent with the legal authority for the execution of such lease, provided that the term of any such lease shall run for a period of not less than 50 years from the date the mortgage is executed.

(b) The property constituting security for the mortgage must be held by an eligible mortgagor as herein defined and must, at the time the mortgage is insured, be free and clear of all liens other than that of such mortgage, except that the property may be subject to an inferior lien made or held by a Federal, State or local gov

ernmental agency or instrumentality as provided in § 207.9(b).

[36 FR 24537, Dec. 22, 1971, as amended at 37 FR 1245, Jan. 27, 1972; 48 FR 35391, Aug. 4, 1983; 49 FR 12215, Mar. 29, 1984; 50 FR 4647, Feb. 1, 1985]

8 207.24 Development of property.

(a) At the time the mortgage is insured, the mortgagor shall be obligated to construct and complete new housing accommodations on the mortgaged property that are designed principally for residential use, conform to standards satisfactory to the Commissioner, and consist of not less than five rental dwelling units on one site. These units may be detached, semi-detached, or row houses, or multifamily structures. The Commissioner may also insure a mortgage on a completed project constructed pursuant to a Commitment to Insure upon Completion, or

(b) At the time the mortgage is insured, there shall be located on the mortgaged property a building or buildings that require substantial rehabilitation (as defined in paragraph (c) of this section) and, that upon completion of substantial rehabilitation, shall constitute a single project and provide housing accommodations designed principally for residential use, conform to standards satisfactory to the Commissioner, and contain at least five rental dwelling units so located in relation to one another as to effect a substantial improvement of housing standards and conditions in the neighborhood. In the case of both newly constructed and existing housing, the housing and improvements, if any, must not violate any material zoning or deed restriction applicable to the project site, and must comply with all applicable building and other government regulations. A project may include such commercial and community facilities as the Commissioner deems adequate to serve the occupants.

(c) "Substantial rehabilitation" consists of repairs, replacements, and improvements:

(1) The cost of which exceeds the greater of: