24 Cfr 242

§ 241.1220

24 CFR Ch. II (4–1–12 Edition)

§ 207.259(c) of this chapter shall also include an amount bid by the lender to
satisfy the senior insured mortgage at
the foreclosure sale.
§ 241.1220 Termination of insurance
benefits.
All of the provisions of § 207.253a of
this chapter apply to subpart F of this
part, except that the following shall
also constitute grounds for terminating the contract of insurance:
(a) The failure of the lender to notify
the Commissioner in a timely manner
of a foreclosure action initiated by the
holder of the senior insured mortgage;
and
(b) The failure of the lender when directed by the Commissioner to assign
the equity or acquisition loan or bid an
amount necessary to acquire title to
the project and convey the project to
the Commissioner, in accordance with
§ 241.1210.
§ 241.1230 No vested right in fund.
Neither the lender nor the borrower
shall have any vested or other right in
the insurance fund under which the
loan is insured.

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§ 241.1235 Cross default.
In the event the borrower commits a
default under a prior recorded insured
mortgage and the holder thereof initiates a foreclosure proceeding, said default under the prior recorded insured
mortgage shall constitute a default
under the equity or acquisition loan.
§ 241.1245 Insurance endorsement.
(a) Endorsement. The Commissioner
shall indicate his insurance of the equity loan or acquisition loan by endorsing the original credit instrument and
identifying the section of the Act and
the regulations under which the loan is
insured and the date of insurance.
(b) Endorsement of phased loan. In the
event the loan is phased, the Commissioner shall indicate his insurance of
each amount by endorsing the original
credit instrument and identifying the
section of the Act and the regulations
under which such amount is insured
and the date of the insurance.
(c) Final advance of phased loan. When
all advances of a phased loan have been
made and the terms and conditions of

the commitment have been complied
with to the satisfaction of the Commissioner, the Commissioner shall indicate on the original credit instrument
the total of all advances the Commissioner has approved for insurance and
again endorse such instrument.
§ 241.1250 Effect of endorsement.
From the date that the equity or acquisition loan is endorsed, the Commissioner and the lender shall be bound by
the provisions of subpart F of this part
to the same extent as if they had executed a contract including the provisions of subpart F of this part and the
applicable sections of the Act.

PART 242—MORTGAGE
INSURANCE FOR HOSPITALS
Subpart A—General Eligibility
Requirements
Sec.
242.1 Definitions.
242.2 Program financial self-sufficiency.
242.3 Encouragement of certain programs.
242.4 Eligibility for insurance and transition provision.
242.5 Eligible mortgagees/lenders.
242.6 Property requirements.
242.7 Maximum mortgage amounts.
242.8 Standards for licensure and methods
of operation.
242.9 Physician ownership.
242.10 Eligible mortgagors.
242.11 Regulatory compliance required.
242.13 Parents and affiliates.
242.14 Mortgage reserve fund.
242.15 Limitation on refinancing existing
indebtedness.

Subpart B—Application Procedures and
Commitments
242.16 Applications.
242.17 Commitments.
242.18 Inspection fee.
242.19 Fees on increases.
242.20 Reopening of expired commitments.
242.21 Refund of fees.
242.22 Maximum fees and charges by mortgagee.
242.23 Maximum mortgage amounts and
cash equity requirements.
242.24 Initial operating costs.

Subpart C—Mortgage Requirements
242.25 Mortgage form and disbursement of
mortgage proceeds.
242.26 Agreed interest rate.
242.27 Maturity.

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Office of Assistant Secretary for Housing, HUD
242.28 Allowable costs for consultants.
242.29 Payment requirements.
242.30 Application of payments.
242.31 Accumulation of accruals.
242.32 Covenant against liens.
242.33 Covenant for malpractice, fire, and
other hazard insurance.
242.35 Mortgage lien certifications.
242.37 Mortgage prepayment.
242.38 Late charge.

Subpart D—Endorsement for Insurance
242.39
242.40
242.41
242.42
242.43

Insurance endorsement.
Mortgagee certificate.
Certification of cost requirements.
Certificates of actual cost.
Application of cost savings.

Subpart E—Construction
242.44 Construction standards.
242.45 Early commencement of work.
242.46 Insured
advances—building
loan
agreement.
242.47 Insured advances for building components stored off-site.
242.48 Insured advances for certain equipment and long lead items.
242.49 Funds and finances: deposits and letters of credit.
242.50 Funds and finances: off-site utilities
and streets.
242.51 Funds and finances: insured advances
and assurance of completion.
242.52 Construction contracts.
242.53 Excluded contractors.

Subpart F—Nondiscrimination and Wage
Rates
242.54
242.55

Nondiscrimination.
Labor standards.

Subpart G—Regulatory Agreement, Accounting and Reporting, and Financial
Requirements

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242.56 Form of regulation.
242.57 Maintenance of hospital facility.
242.58 Books, accounts, and financial statements.
242.59 Inspection of facilities by Commissioner.
242.61 Management.
242.62 Releases of lien.
242.63 Additional indebtedness and leasing.
242.64 Current and future property.
242.65 Distribution of assets.
242.66 Affiliate transactions.
242.67 New corporations, subsidiaries, affiliations, and mergers.

Subpart H—Miscellaneous Requirements
242.68 Disclosure and verification of Social
Security and Employer Identification
Numbers.

§ 242.1

242.69 Transfer fee.
242.70 Fees not required.
242.72 Leasing of hospital.
242.73 Waiver of eligibility requirements for
mortgage insurance.
242.74 Smoke detectors.
242.75 Title requirements.
242.76 Title evidence.
242.77 Liens.
242.78 Zoning, deed, and building restrictions.
242.79 Environmental quality determinations and standards.
242.81 Lead-based paint poisoning prevention.
242.82 Energy conservation.
242.83 Debarment and suspension.
242.84 Previous participation and compliance requirements.
242.86 Property and mortgage assessment.
242.87 Certifications.
242.89 Supplemental loans.
242.90 Eligibility of mortgages covering hospitals in certain neighborhoods.
242.91 Eligibility of refinancing transactions.
242.92 Minimum principal loan amount.
242.93 Amendment of regulations.
AUTHORITY: 12 U.S.C. 1709, 1710, 1715b, 1715u,
and 1715z–7; 42 U.S.C. 3535d.
SOURCE: 72 FR 67546, Nov. 28, 2007, unless
otherwise noted.

Subpart A—General Eligibility
Requirements
§ 242.1 Definitions.
As used in this subpart, the following
terms shall have the meaning indicated:
Act means the National Housing Act
(12 U.S.C. 1701 et seq.).
Affiliate means a person or entity
which, directly orindirectly, either
controls or has the power to control or
exert significant influence on the
other, or a person and entity both controlled by a third person or entity,
which may be a parent entity. Indicia
of control include, but are not limited
to: Interlocking management or ownership, identity of interests among family members, shared facilities and
equipment, common use of employees,
or a business entity organized following the suspension or debarment of
a person or entity that has the same or
similar management, ownership, or
principal employees as the suspended,
debarred, ineligible, or voluntarily excluded person or entity or as defined in

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§ 242.1

24 CFR Ch. II (4–1–12 Edition)

the Medicare reimbursement regulations.
AMPO
(Allowance
for
Making
Project Operational) relates to nonprofit projects and means a fund that is
primarily for accruals during the
course of construction for mortgage insurance
premiums
(MIPs),
taxes,
ground rents, property insurance premiums, and assessments, when funds
available for these purposes under the
Building Loan Agreement have been
exhausted; and also for allocation to
such accruals after completion of construction, if the income from the hospital at that time is insufficient to
meet such accruals. AMPO may also be
used for such other purposes as approved by HUD. Any balance remaining
unused in the fund at final endorsement will be treated in accordance
with § 242.43.
Applicant means a HUD multifamilyapproved lender that would be the
mortgagee of record.
Chronic convalescent and rest means
skilled nursing services, intermediate
care services, respite care services,

hospice services, and other services of a
similar nature.
Construction means the creation of a
new or replacement hospital facility,
or the substantial rehabilitation of an
existing facility. The cost of acquiring
new or replacement equipment may be
included in the cost of construction.
Days of cash on hand means the number of days of operating cash available
to the hospital, calculated pursuant to
standards determined by HUD.
Debt service coverage ratio is a measure of a hospital’s ability to pay interest and principal with cash generated
from current operations. Debt service
ratio is calculated as follows: Debt
Service Coverage Ratio (total debt
service coverage on all long-term capital debt) equals the excess of revenues
over expenses (not-for-profit) or net income (for-profit) plus interest expense
plus depreciation expense plus amortization expense, all divided by current
portion of long-term debt (including
capital leases) from the previous year’s
audited financial statement plus interest expense. The calculation can be expressed as:

Hospital means a facility that has
been proposed for approval or has been
approved by HUD under the provisions
of this subpart, and:
(1) That provides community services
for inpatient medical care of the sick
or injured (including obstetrical care);
(2) Where not more than 50 percent of
the total patient days during any year
are customarily assignable to the categories of chronic convalescent and
rest, drug and alcoholic, epileptic,
mentally deficient, mental, nervous
and mental, and tuberculosis, except
that the 50 percent patient day restriction does not apply to Critical Access
Hospitals (hospitals designated as such
under the Medicare Rural Hospital
Flexibility Program) between January
28, 2008 and July 31, 2011.
(3) That is a facility licensed or regulated by the state (or, if there is no
such state law providing for such li-

censing or regulation by the state, by
the municipality or other political subdivision in which the facility is located) and is:
(i) A public facility owned by a state
or unit of local government or by an
instrumentality thereof, or owned by a
public benefit corporation established
by a state or unit of local government
or by an instrumentality thereof;
(ii) A proprietary facility; or
(iii) A facility of a private nonprofit
corporation or association.
Identity of interest means a relationship that must be disclosed and may be
prohibited pursuant to the requirements of the Regulatory Agreement.
Examples of a prohibited Identity of
Interest relationship are, but are not
limited to, a financial or family relationship between the mortgagor (which

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ER28NO07.052

PMANGRUM on DSK3VPTVN1PROD with CFR

(Excess of revenues over expenses OR net income) + interest expense + depreciation expense + amortization expense
Current portion of long-term debt [prior year, including capital leases] + interest expense

PMANGRUM on DSK3VPTVN1PROD with CFR

Office of Assistant Secretary for Housing, HUD
includes but is not limited to an officer, director, or partner of the mortgagor) and general contractor, subcontractor, seller of the land or property,
any consultants, or other parties to the
transaction.
Mortgage means such classes of first
liens as are commonly given to secure
advances on, or the unpaid purchase
price of, real estate under the laws of
the state in which the real estate is located, together with any mortgage
note secured thereby. The mortgage
may be in the form of one or more
trust mortgages or mortgage indentures or deeds of trust securing notes,
bonds, or other mortgage notes; and,
by the same instrument or by a separate instrument, it may create a security interest in the personalty, including, but not limited to, the equipment,
whether or not the equipment is attached to the realty, and in the revenues and receivables of the hospital.
Mortgagee or lender means the applicant for insurance or the original lender under a mortgage.
Mortgagor means the original borrower under a mortgage and its successors and assigns.
Mortgage Reserve Fund means a trust
account, or an account held by the
mortgagee, for and on behalf of the
mortgagor, to which the mortgagor
contributes and from which withdrawals must be approved by HUD. The
purpose of the fund is to provide HUD
a means to assist the hospital to avoid
mortgage defaults and to preserve the
value of the mortgaged property and
the hospital’s business.
Most recent audited financial statement
means the audited financial statement
required under the regulatory agreement for the prior fiscal year.
Net income means the net income of a
for-profit entity, or, in the case of a
nonprofit entity, the excess of revenues
less expenses.
Non-operating revenues and expenses
are those revenues and expenses not directly related to patient care, hospitalrelated patient services, or the sale of
hospital-related goods. Examples of
items classified as non-operating are
state and federal income tax, general
contributions, gains and losses from investments, unrestricted income from

§ 242.1

endowment funds, and income from related entities.
Classification of items as operating
or non-operating shall follow written
guidance by HUD.
Operating margin is operating income
divided by operating revenue, where:
(1) Operating revenue is the revenue
from the core patient care operations
of the hospital. It includes revenues
from the provision of such items as patient care (including, but not limited
to, hospital-based nursing home and
physicians’ clinics); transfers from
temporarily restricted accounts that
are used for current operating expenses; and patient-related activities
such as the operation of the cafeteria,
parking facilities, television services
to patients, sale of medical scrap or
waste, etc. (Additional sources of revenue, which are classified as non-operating, are excluded from this measure,
provided, however, at HUD’s discretion,
that revenue that has historically been
received reliably and is expected to
continue to be received may be considered operating revenue for underwriting purposes); and
(2) Operating income is operating revenue minus operating expenses, where
operating expenses are the expenses incurred in providing patient care, including such items as salaries, supplies, and the cost of capital.
Parent means an organization or entity that controls or has a controlling
interest in another organization or entity.
Personalty means all furniture, furnishings, equipment, machinery, building materials, appliances, goods, supplies, tools, books, records (whether in
written or electronic form), computer
equipment (hardware and software) and
other tangible or electronically stored
personal property (other than fixtures)
that are owned or leased by the borrower or the lessee now or in the future
in connection with the ownership,
management, or operation of the land
or the improvements or are located on
the land or in the improvements, and
any operating agreements relating to
the land or the improvements, and any
surveys, plans, specifications, and contracts for architectural, engineering,
and construction services relating to
the land or the improvements, chooses

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§ 242.1

24 CFR Ch. II (4–1–12 Edition)

in action and all other intangible property and rights relating to the operation of, or used in connection with,
the land or the improvements, including all governmental permits relating
to any activities on the land. Personalty also includes all tangible and intangible personal property used for
health care (such as major movable
equipment and systems), accounts, licenses, bed authorities, certificates of
need required to operate the hospital
and to receive benefits and reimbursements under provider agreements with
Medicaid, Medicare, state and local
programs, payments from health care
insurers and any other assistance providers (‘‘Receivables’’); all permits, instruments, rents, lease and contract
rights, and equipment leases relating
to the use, operation, maintenance, repair, and improvement of the hospital.
Generally, intangibles shall also include all cash and cash escrow funds,
such as but not limited to: Depreciation reserve fund or mortgage reserve
fund accounts, bank accounts, residual
receipt accounts, all contributions, donations, gifts, grants, bequests, and endowment funds by donors, and all other
revenues and accounts receivable from
whatever source paid or payable. All
personalty shall be securitized with appropriate UCC filings and any excluded
personalty shall be indicated in the
Regulatory Agreement.
Preapplication meeting means a meeting among HUD, a potential mortgagee
(applicant), and a potential mortgagor
for mortgage insurance where there
has been a positive Preliminary Review
of
the
proposed
project.
The
preapplication meeting is an opportunity for the potential mortgagee and
mortgagor to summarize the proposed
project, for HUD to summarize the application process, and for issues that
could affect the eligibility or underwriting of the proposed loan to be identified and discussed.
Preliminary Review Letter means a letter from HUD to a potential applicant
communicating the result of the Preliminary Review. The letter may state
that an application for mortgage insurance would probably not be successful
and provide the reasons for this determination, or state that no factors that
would cause an application to be re-

jected have been identified, and therefore there appears to be no bar to the
applicant
proceeding
to
a
preapplication meeting.
Project
means
the
construction
(which may include replacement of an
existing hospital facility) or substantial rehabilitation of an eligible hospital, including equipment, which has
been proposed for approval or has been
approved by HUD under the provisions
of this subpart, including the financing
and refinancing, if any, plus all related
activities involved in completing the
improvements to the property. However, in particular closing documents,
‘‘project’’ may be used to mean the
mortgagor entity, the operation of the
mortgagor, the facility, or all of the
mortgaged property, depending on the
context in which it is used.
Regulatory Agreement means the
agreement under which all mortgagors
shall be regulated by HUD, as long as
HUD is the insurer or holder of the
mortgage, in a published format determined by HUD, and such additional
covenants and restrictions as may be
determined necessary by HUD on a
case-by-case basis.
Secretary means the Secretary of
Housing and Urban Development or his
or her authorized representatives.
Security instrument means a mortgage, deed of trust, and any other security for the indebtedness, and shall be
deemed to be the mortgage as defined
by the National Housing Act, as
amended, implementing regulations,
and HUD directives.
Service area means that geographical
area, identified by zip codes, from
which a substantial majority of a hospital’s patients derive.
State includes the several states,
Puerto Rico, the District of Columbia,
Guam, the Trust Territory of the Pacific Islands, American Samoa, and the
United States Virgin Islands.
Substantial rehabilitation means additions, expansion, remodeling, renovation, modernization, repair, and alteration of existing buildings, including
acquisition of new or replacement
equipment.
Surplus Cash means any cash remaining after all of the following conditions
have been met:

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Office of Assistant Secretary for Housing, HUD
(1) Final endorsement of the HUD-insured note has occurred;
(2) Mortgage payments for the preceding 12 months have been made when
due, including any grace period;
(3) The Debt Service Coverage Ratio
is greater than or equal to 1.50 in the
most recent audited financial statements and as of the date of distribution;
(4) Days in Accounts Receivable are
less than or equal to 80 in the most recent audited financial statements and
as of the date of distribution;
(5) The average payment period is
less than or equal to 80 in the most recent audited financial statements and
as of the date of distribution;
(6) The Mortgage Reserve Fund
(MRF) is fully funded as of the date of
the distribution in conformity with the
MRF schedule;
(7) All income, property, and statutory employer payroll taxes and employee payroll withholding contributions (including penalties and interest,
if applicable) have been deposited as of
the date of the distribution, as required;
(8) The Current Ratio is greater than
or equal to 1.50 in the most recent audited financial statements and immediately after the distribution;
(9) Days of cash on hand are greater
than or equal to 21 days in the most recent audited financial statements and
immediately after the distribution;
(10) The distribution may not be
more than 50 percent of Net Income as
reflected in the most recent audited financial statements, unless the Mortgagor has an equity financing ratio
equal to or greater than 20 percent in
the most recent audited financial
statements and immediately after the
distribution; and
(11) The Equity less any assets excluded from the mortgaged property is
greater than 0.00 in the most recent audited financial statements and immediately after the distribution is made.
As used in this definition:
‘‘Most recent audited financial statements’’ refers to the audited financial
statement required under section 242.58
for the prior fiscal year;
‘‘Net Income’’ means Net Income for
for-profit entities; Excess of Revenues
over Expenses for not-for-profit enti-

§ 242.4

ties; and Excess of Revenues over Expenses before Capital Grants, Contributions, and Additions to Permanent Endowment for governmental entities;
and
‘‘Equity financing ratio’’ means (Equity less any assets excluded from the
mortgaged property)/(total assets less
any assets excluded from the mortgaged property). Equity is defined as
Equity for a for-profit entity, Total
Net Assets for not-for-profit entities,
and Total Net Assets for governmental
entities.
[72 FR 67546, Nov. 28, 2007, as amended at 73
FR 35922, June 25, 2008]

§ 242.2 Program
ciency.

financial

self-suffi-

The Commissioner shall administer
the Section 242 program in such a way
as to encourage financial self-sufficiency and actuarial soundness; i.e., to
avoid mortgage defaults and claims for
insurance benefits in order to protect
the mortgage insurance fund.
§ 242.3 Encouragement of certain programs.
The activities and functions provided
for in this part shall be carried out so
as to encourage provision of comprehensive health care, including outpatient and preventive care as well as
hospitalization, to a defined population, and in the case of public and
certain not-for-profit hospitals, to encourage programs that are undertaken
to provide essential health care services to all residents of a community regardless of ability to pay.
§ 242.4 Eligibility for insurance and
transition provision.
(a) The hospital to be financed with a
mortgage insured under this part shall
involve the construction of a new hospital or the substantial rehabilitation
(or replacement) of an existing hospital.
(b) This part applies only to applications for FHA mortgage insurance submitted after a pre-application meeting
(as defined in § 242.1) with HUD that occurred on and after January 28, 2008.
HUD’s regulations and practices prior

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§ 242.5

24 CFR Ch. II (4–1–12 Edition)

to January 28, 2008 apply to applications for FHA mortgage insurance submitted after a pre-application meeting
that occurred before January 28, 2008.
§ 242.5 Eligible mortgagees/lenders.
The lender requirements set forth in
24 CFR part 202 regarding approval, recertification, withdrawal of approval,
approval for servicing, report requirements, and conditions for supervised
mortgagees, nonsupervised mortgagees,
investing mortgagees, and governmental and similar institutions, apply
to these programs.
§ 242.6 Property requirements.
The mortgage, to be eligible for insurance, shall be on property located in
a state, as defined in § 242.1. The mortgage shall cover real estate in which
the mortgagor has one of the following
interests:
(a) A fee simple title;
(b) A lease for not less than 99 years
that is renewable; or
(c) A lease having a term of not less
than 50 years to run from the date the
mortgage is executed.
§ 242.7 Maximum mortgage amounts.
The mortgage shall involve a principal obligation not in excess of 90 percent of HUD’s estimate of the replacement cost of the hospital, including the
equipment to be used in its operation
when the proposed improvements are
completed and the equipment is installed.

PMANGRUM on DSK3VPTVN1PROD with CFR

§ 242.8 Standards for licensure and
methods of operation.
The Secretary shall require satisfactory evidence that the hospital will be
located in a state or political subdivision of a state with reasonable minimum standards of licensure and methods of operation for hospitals, and satisfactory assurance that such standards will be applied and enforced with
respect to the hospital.
§ 242.9 Physician ownership.
Ownership of an interest in the mortgagor by physicians or other professionals practicing in the hospital is
permitted within limits determined by
HUD to avoid insurance risks that may
be associated with such ownership. The

Commissioner shall determine if the
proposed mortgagor will be at low risk
for violation of regulations of the U.S.
Department of Health and Human
Services, other federal regulations, and
state regulations governing kickbacks,
self-referrals, and other issues that
could increase the risk of eventual default. The Commissioner’s determination shall be based on an unqualified
legal opinion as to compliance with applicable federal law, among other considerations.
§ 242.10

Eligible mortgagors.

The mortgagor shall be a public
mortgagor (i.e., an owner of a public facility), a private nonprofit corporation
or association, or a profit-motivated
mortgagor meeting the definition of
‘‘hospital’’ in § 242.1. The mortgagor
shall be approved by HUD and, except
in those cases where the hospital is
leased as permitted in § 242.72, shall
possess the powers necessary and incidental to operating a hospital. Eligible
proprietary or profit-motivated mortgagors may include for-profit corporations, limited partnerships, and limited
liability corporations and companies,
but may not include natural persons,
joint ventures, and general partnerships. Any proposed mortgagor must
demonstrate that it has a continuity of
organization commensurate with the
term of the mortgage loan being insured. For new organizations, or those
whose continuity is necessarily dependent upon an individual or individuals,
broad community participation is required.
[72 FR 67546, Nov. 28, 2007, as amended at 73
FR 35922, June 25, 2008]

§ 242.11 Regulatory
quired.

compliance

An application for insurance of a
mortgage under this part shall be considered only in connection with a hospital that is in substantial compliance
with regulations of the Department of
Health and Human Services and the
regulations of the applicable state governing the operation and reimbursement of hospitals. A hospital that is
under investigation by any state or
federal agency for statutory or regulatory violations is not eligible so long

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Office of Assistant Secretary for Housing, HUD
as the investigation is unresolved, unless HUD determines that the investigation is minor in nature; that is, the
investigation is unlikely to result in
substantial liabilities or to otherwise
substantially harm the creditworthiness of the hospital.

tion 242 insured loan; however, the
hard costs of construction and equipment must represent at least 20 percent of the total mortgage amount.

§ 242.13 Parents and affiliates.
As a condition of issuing a commitment, HUD may require corporate parents, affiliates, or principals of the proposed mortgagor to provide assurances,
guarantees, or collateral to protect
HUD’s interests. The Commissioner
may also require financial and operational information on the parent,
other businesses owned by the parent,
or affiliates of the proposed mortgagor
and may also require a parent or affiliate to be regulated by HUD as to certain actions that could impact on the
insurance of a mortgage loan for the
benefit of the hospital.

§ 242.16 Applications.
(a) Application process—(1) Market
need. The approval process entails a determination of the market need of the
proposal and stresses, on a marketwide basis, the impact of the proposed
facility on, and its relationship to,
other health care facilities and services
(particularly other hospitals with
mortgages insured under this part and
hospitals that have a disproportionate
share of Medicaid and uninsured patients or provide a substantial amount
of charity care); the number and percentage of any excess beds; and demographic projections. Generally, Section
242 insurance may support start-up
hospitals or major expansions of existing hospitals only if existing hospital
capacity or services are clearly not
adequate to meet the needs of the population in the service area.
(i) If the state has an official procedure for determining need for hospitals, HUD shall require that such
procedure be followed before the application for insurance is submitted, and
that the application document that
need has also been established under
that procedure.
(ii) The following factors are relevant
in evaluating market need for the
project and should be addressed, as applicable, in the study of market need
and feasibility submitted with the application. Because each hospital presents a unique situation, there is no
formula or cutoff level that applies to
all applications:
(A) Service area definition;
(B) Existing or proposed hospital;
(C) Designation as sole community
provider, Critical Access Hospital, or
rural referral center;
(D) Community-wide use rates (discharges and days/1000);
(E)
Statewide
use
rates
(for
benchmarking purposes);
(F) Current population and 5-year
projection by age cohort;
(G) Staffed versus licensed beds;

§ 242.14 Mortgage reserve fund.
As a condition of issuing a commitment, HUD shall require establishment
of a Mortgage Reserve Fund (MRF).
The mortgagor shall be required to
make contributions to the MRF such
that, with fund earnings, the MRF will
build to one year of debt service at 5
years following commencement of amortization, increasing thereafter to 2
years of debt service on and after 10
years following commencement of amortization according to a schedule established by HUD, unless HUD determines that a different schedule of contributions is appropriate based on the
mortgagor’s risk profile, reimbursement structure, or other characteristics. In particular, hospitals that receive cost-based reimbursement may
be required to have MRFs that build to
more than 2 years of debt service. Expenditures from the fund are made at
HUD’s sole discretion or in accordance
with the mortgagor’s MRF Schedule.
Upon termination of insurance, the
balance of the MRF shall be returned
to the mortgagor, provided that all obligations to HUD have been met.
PMANGRUM on DSK3VPTVN1PROD with CFR

§ 242.16

§ 242.15 Limitation on refinancing existing indebtedness.
Some existing capital debt may be
refinanced with the proceeds of a sec-

Subpart B—Application
Procedures and Commitments

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§ 242.16

24 CFR Ch. II (4–1–12 Edition)

(H) Applicant hospital’s occupancy
rate;
(I) Competitors’ occupancy rates;
(J) Outpatient volume;
(K) Availability of emergency services;
(L) Teaching hospital status;
(M) Services offered by hospitals in
the service area;
(N) Migration of patients out of the
service area;
(O) Planned construction at other facilities in the region;
(P) Historical market share by major
service category;
(Q) Disproportionate Share Hospital
designation; and
(R) Distance to other hospitals.
(2) Operating margin and debt service
coverage ratio. (i) Hospitals with an aggregate operating margin of less than
0.00 when calculated from the three
most recent annual audited financial
statements are not eligible for Section
242 insurance, unless HUD determines,
based on the financial data in those
statements, that the hospital has
achieved a financial turnaround resulting in a positive operating margin in
the most recent year, calculated using
classifications of items as operating or
non-operating in accordance with guidance that shall be provided in written
directives by HUD. In any event, HUD
shall not issue an insurance commitment for any hospital in a turnaround
situation that has not achieved 2 consecutive years of positive operating
margin immediately prior to issuance
of the commitment.
(ii) Hospitals with an average debt
service coverage ratio of less than 1.25
in the 3 most recent audited years are
not eligible for Section 242 insurance,
unless HUD determines, based on the
audited financial data, that the hospital has achieved a financial turnaround resulting in a debt service coverage ratio of at least 1.40 in the most
recent year. In cases of refinancing at
a lower interest rate, HUD may authorize the use of the projected debt service
requirement in lieu of the historical
debt in calculating the debt service
coverage ratios for each of the prior 3
years. In cases where HUD authorizes
the use of the projected debt service requirement in lieu of the historical debt
to determine the debt service coverage

ratio, hospitals must have an average
debt service coverage ratio of 1.40 or
greater.
(3) Financial feasibility. The approval
process entails a determination of the
financial feasibility of the proposal,
i.e., a determination that it is probable
that the proposed mortgagor will be
able to meet its debt service requirements during the period projected. It
includes analysis of the reimbursement
structure of the proposed hospital (including patient/payer mix); actions of
competitors; and the probable projected impact on the proposed hospital
of general health care system trends,
such as the development of alternative
health care delivery systems and new
reimbursement methods. In addition to
historical operating margin, determination of financial feasibility includes, but is not limited to, evaluation of the following factors, which the
application must address and which
HUD will review:
(i) Current and projected gains from
operations and a manageable debt load
using reasonable assumptions;
(ii) Current debt service coverage
ratio of 1.25 or higher and projected
debt service coverage ratio of 1.40 or
higher;
(iii) Cushion in the balance sheet sufficient to demonstrate the ability to
withstand short periods of net operating losses without jeopardizing financial viability;
(iv) Patient utilization forecasts (including average length of stay, case intensity, discharges, area-wide use
rates) that are consistent with the hospital’s historical trends, future service
mix, market trends, population forecasts, and business climate;
(v) The hospital’s demonstrated ability to position itself to compete in its
marketplace;
(vi) Organizational affiliations or relationships that help optimize financial, clinical, and operational performance;
(vii) Management’s demonstrated
ability to operate effectively and efficiently, and to develop effective strategies for addressing problem areas;
(viii) Systems in place to monitor
hospital operations, revenues, and
costs accurately and in a timely manner;

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Office of Assistant Secretary for Housing, HUD
(ix) A Board that is appropriately
constituted and provides effective oversight;
(x) Required licensures and approvals; and
(xi) Favorable ratings from the Joint
Commission
on
Accreditation
of
Healthcare Organizations or other organizations acceptable to HUD.
(4) Preliminary Review. A Preliminary
Review is a general overview of the acceptability of a potential mortgagor
performed at the request of a hospital,
a financial consultant representing a
hospital, or a lender, to identify any
factors that would likely cause an application to be rejected, should an application be submitted.
(i) The purpose of the preliminary review is for HUD to identify any obvious
factors that would cause an application
to be rejected, before the potential
mortgagor or mortgagee expends resources to prepare one. The hospital, financial consultant, or lender shall submit a preliminary information package
to HUD that provides evidence of statutory eligibility, market need, financial strength, and such other documentation as HUD may require. The
scope of the preliminary review does
not include approval of any specific
site in the community.
(ii) If HUD identifies factors that
would cause an application to be rejected, HUD shall issue a Preliminary
Review Letter notifying the potential
applicant that an application for mortgage insurance would probably not be
successful and providing the reasons
for this decision. Also, no further request from the proposed applicant for a
Preliminary Review shall be entertained for a period of one year from the
date of HUD’s notification. HUD may
grant an exception to this one-year
limitation if, during the year, there is
a major change in the circumstances
that caused HUD to determine that the
project would be rejected. For example,
if the sole reason for HUD’s determination was the hospital’s failure to meet
the historical operating margin test,
and a new audited annual financial
statement contains results that would
cause the hospital to meet the test,
then the lender may request a new Preliminary Review within one year of
HUD’s notification.

§ 242.16

(iii) If HUD does not identify any factors that would cause an application to
be rejected, HUD shall issue a Preliminary Review Letter advising the potential applicant that there appears to be
no bar to the applicant’s proceeding to
the next step in the application process, provided that if a complete application is not received by HUD within
one year following the date of HUD’s
letter, another Preliminary Review
may be required, at HUD’s discretion,
before the application process may proceed.
(iv) The Commissioner’s determination in the preliminary review phase
that no factors have been identified
that would cause an application to be
rejected shall in no way be construed
as an indication that a subsequent application will be approved.
(5) Preapplication meeting. The next
step in the application process is the
preapplication meeting. At HUD’s discretion, this meeting may be held at
HUD Headquarters in Washington, DC,
or at another site agreeable to HUD
and the potential applicant. The
preapplication meeting is an opportunity for the potential mortgagor to
summarize the proposed project, for
HUD to summarize the application
process, and for issues that could affect
the eligibility or underwriting of the
project to be identified and discussed
to the extent possible. Following the
meeting, HUD may:
(i) Advise the potential applicant
that there appears to be no bar to submitting an application for mortgage
insurance; or
(ii) Identify issues that must be resolved before a full application should
be submitted for processing.
(b) Application contents. The application for mortgage insurance shall include exhibits that follow such guidance as to content and format that
HUD shall provide from time to time.
The application shall include:
(1) A description of the proposed
sources and uses of funds;
(2) A description of the mortgagor entity, its ownership structure, and its
directors and managers;
(3) A description of the project, the
business plan of the hospital, and how
the project will further that plan;

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§ 242.17

24 CFR Ch. II (4–1–12 Edition)

(4) Historical audited financial statements and interim year-to-date financial results (for existing hospitals);
(5) A study of market need and financial feasibility, addressing the factors
listed in paragraphs (a)(1)(ii), (a)(2),
and (a)(3) of this section, with assumptions and financial forecast clearly presented, and prepared by a certified accounting firm acceptable to HUD;
(6) Architectural plans and specifications in sufficient detail to enable a
reasonable estimate of cost;
(7) Evidence that the hospital will be
located in a state or political subdivision of a state with reasonable minimum standards of licensure and methods of operation for hospitals and satisfactory assurance that such standards
will be applied and enforced with respect to the hospital;
(8) If the state has an official procedure for determining need for hospitals, evidence that such procedure
has been followed and that need has
been established under that procedure;
(9) A Phase I environmental report;
and
(10) Such other exhibits as HUD shall
require based upon the facts pertaining
to the particular case.
(c) Fee. An application fee of $1.50 per
thousand dollars of the amount of the
loan to be insured shall be paid to HUD
at the time the application is submitted to HUD for approval.
(d) Filing of application. An application for insurance of a mortgage on a
project shall be submitted on an approved FHA form by an approved mortgagee and by the sponsors of such
project to the FHA Office of Insured
Health Care Facilities.
(e) Complete application. Only technically complete applications will be
processed. Partial applications cannot
be processed. Upon determination that
an application is complete, HUD shall
issue a Completeness Letter to the applicant stating that the application is
complete.
(f) Application review. Upon receipt of
a complete application, HUD shall
evaluate the application to determine
if eligibility, market need, financial
feasibility, and compliance with applicable regulations (including but not
limited to federal environmental regulations, wage rate regulations, and

health care regulations) have been
demonstrated, and to evaluate any
other factors, including but not limited
to risk to the Insurance Fund, that
should be considered in determining if
the application for mortgage insurance
should be approved. As a part of this
review, HUD may solicit the advice of
private consultants and expert staff in
the Department of Health and Human
Services and other federal agencies.
Based on review of the complete application, HUD may request additional information from the applicant. The
timeliness of the applicant’s submission of the additional information may
affect the approval or disapproval of
the application. The Commissioner’s
decision shall be communicated in the
form of a Commitment Letter or a Rejection Letter. HUD will not issue a
Commitment Letter until HUD completes the environmental review under
24 CFR 242.79.
§ 242.17

Commitments.

(a) Issuance of commitment. Upon approval of an application for insurance,
a commitment shall be issued by HUD
setting forth the terms and conditions
under which an insurance endorsement
shall be issued for the hospital. The
commitment shall include the following:
(1) A commitment for insurance of
advances reflecting the mortgage
amount, interest rate, mortgage term,
date of commencement of amortization, and other requirements pertaining to the mortgage and construction project;
(2) HUD’s computation of the replacement cost and maximum insurable
mortgage amount;
(3) Financial requirements for closing;
(4) Approval covenants, including any
special conditions that must be satisfied prior to initial endorsement;
(5) Mortgage Reserve Fund Agreement.
(b) Type of commitment. The commitment will provide for the insurance of
advances of mortgage funds during construction.
(c) Term of commitment. (1) The initial
commitment shall be issued for a period of 90 days.

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Office of Assistant Secretary for Housing, HUD
(2) The term of a commitment may
be extended in such manner as HUD
may prescribe, provided, however, that
the combined term of the original commitment and any extensions do not exceed 180 days.
(d) Commitment fee. A commitment
fee that, when added to the application
fee, will aggregate $3 per thousand dollars of the amount of the loan set forth
in the commitment, shall be paid within 30 days of the date of issuance of the
commitment. If such fee is not paid
within this 30-day period, the commitment shall automatically terminate.

PMANGRUM on DSK3VPTVN1PROD with CFR

§ 242.18 Inspection fee.
The commitment may provide for the
payment of an inspection fee in an
amount not to exceed $5 per thousand
dollars of the commitment. The inspection fee shall be paid at the time of initial endorsement.
§ 242.19 Fees on increases.
(a) Increase in commitment prior to endorsement. An application, filed prior to
initial endorsement, for an increase in
the amount of an outstanding commitment, shall be accompanied by an additional application fee of $1.50 per thousand dollars computed on the amount
of the increase requested. Any increase
in the amount of a commitment shall
be subject to the payment of an additional commitment fee which, when
added to the additional application fee,
will aggregate $3 per thousand dollars
of the amount of the increase. The additional commitment fee shall be paid
within 30 days after the date of the
amended commitment. If the additional commitment fee is not paid
within 30 days, the commitment novation providing for the increased
amount will automatically terminate
and the previous commitment will be
reinstated. If an inspection fee was required in the original commitment, an
additional inspection fee shall be paid
in an amount not to exceed $5 per thousand dollars of the amount of increase
in commitment. The additional inspection fee shall be paid at the time of initial endorsement.
(b) Increase in mortgage between initial
and final endorsement. Upon an application, filed between initial and final endorsement, for an increase in the

§ 242.21

amount of the mortgage, either by
amendment, consolidation agreement,
or by substitution of a new mortgage,
an additional application fee of $1.50
per thousand dollars computed on the
amount of the increase requested shall
accompany the application. The approval of any increase in the amount of
the mortgage shall be subject to the
payment of an additional commitment
fee which, when added to the additional
application fee, will aggregate $3 per
thousand dollars of the amount of the
increase granted. If an inspection fee
was required in the original commitment, an additional inspection fee
shall be paid in an amount not to exceed $5 per thousand dollars of the
amount of the increase granted. The
additional commitment and inspection
fees shall be paid within 30 days after
the date that the increase is granted.
§ 242.20 Reopening of expired commitments.
An expired commitment may be reopened if a request for reopening is received by HUD no later than 90 days
after the date of expiration of the commitment. The reopening request shall
be accompanied by a fee of 50 cents per
thousand dollars of the amount of the
expired commitment. A commitment
that has expired because of failure to
pay the commitment fee may be reopened only upon payment of the commitment fee and the reopening fee. If
the reopening request is not received
by HUD within the required 90-day period, a new application accompanied by
an application fee must be submitted.
If a commitment for an increased
amount has expired because of failure
to pay an additional commitment fee
based on the amount of the increase,
the reopening fee shall be computed on
the basis of the amount of the commitment increase rather than on the
amount of the original commitment.
§ 242.21 Refund of fees.
Commitment, inspection, and reopening fees (but not application fees) may
be refunded, in whole or in part, if HUD
determines that the construction or financing of the project has been prevented because of condemnation proceedings or other legal action taken by
a government body or public agency, or

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§ 242.22

24 CFR Ch. II (4–1–12 Edition)

in such other instances as HUD may
determine as being beyond the control
of the applicant and resulting from no
fault of the applicant. A transfer fee
may be refunded only in such instances
as HUD may determine. However, the
portion of the inspection fee paid in
connection with early commencement
of work is not refundable.

PMANGRUM on DSK3VPTVN1PROD with CFR

§ 242.22 Maximum fees and charges by
mortgagee.
The mortgagee may collect from the
mortgagor the amount of the fees provided for in this subpart. The mortgagee may also collect from the mortgagor an initial service charge not to
exceed 2 percent of the original principal amount of the mortgage to reimburse the mortgagee for the cost of
closing the transaction. A permanent
financing fee not to exceed 3.5 percent
may be collected from the mortgagor;
however, the combined initial service
charge and permanent financing fee
may not exceed 5.5 percent in bond
transactions and 3.5 percent in all
other transactions. Any additional
charges or fees collected from the
mortgagor shall be subject to prior approval of HUD and shall be clearly disclosed in the Mortgagee’s Certificate.
§ 242.23 Maximum mortgage amounts
and cash equity requirements.
(a) Adjusted mortgage amount-rehabilitation projects. A mortgage financing
the substantial rehabilitation of an existing hospital shall be subject to the
following limitations, in addition to
those set forth in § 242.7:
(1) Property held unencumbered. If the
mortgagor is the fee simple owner of
the property and the property is not
encumbered by an outstanding indebtedness, the mortgage shall not exceed
100 percent of HUD’s estimate of the
cost of the proposed substantial rehabilitation.
(2) Property subject to existing mortgage. If the mortgagor owns the property subject to an outstanding indebtedness, which is to be refinanced with
part of the insured mortgage, the mortgage shall not exceed the total of the
following:
(i) The Commissioner’s estimate of
the cost of substantial rehabilitation,
plus

(ii) Such portion of the outstanding
indebtedness as does not exceed 90 percent of HUD’s estimate of the fair market value of such land and improvements prior to substantial rehabilitation.
(3) Property to be acquired. If the property is to be acquired by the mortgagor
and the purchase price is to be financed
with a part of the insured mortgage,
the mortgage shall not exceed 90 percent of the total of the following:
(i) The Commissioner’s estimate of
the cost of substantial rehabilitation,
plus
(ii) The actual purchase price of the
land and improvements or HUD’s estimate (prior to substantial rehabilitation) of the fair market value of such
land and improvements, whichever is
the lesser.
(b) Reduced mortgage amount—leaseholds. In the event the mortgage is secured by a leasehold estate rather than
a fee simple estate, the value or replacement cost of the property described in the mortgage shall be the
value or replacement cost of the leasehold estate (as determined by HUD),
which shall in all cases be less than the
value or replacement cost of the property in fee simple.
(c) Cash equity. Depending on the financial circumstances of each hospital
facility, HUD shall have the discretion
to evaluate, on a case-by-case basis,
the amount of equity that a mortgagor
must supply in addition to the value of
plant, property, and equipment and
other values recognized as loan security in the commitment process. Exercise of this discretion shall never cause
a loan to exceed 90 percent of estimated replacement cost, although it
may cause it to be less than 90 percent.
The equity contribution may not be
made from borrowed funds. A private
nonprofit or public mortgagor, but not
a proprietary mortgagor, at the mortgagee’s option and subject to 24 CFR
242.49, may provide any such required
equity in the form of a letter of credit.
[72 FR 67546, Nov. 28, 2007, as amended at 73
FR 35922, June 25, 2008]

§ 242.24 Initial operating costs.
In the case of a new hospital or a hospital expansion, HUD shall establish,
on a case-by-case basis, the amount of

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Office of Assistant Secretary for Housing, HUD
initial operating capital, if any, that
must be deposited in cash or a letter of
credit (or combination) to be available
to the new hospital upon commencement of operations. Generally, the initial operating capital other than
AMPO shall not be borrowed funds unless HUD determines that there are offsetting financial strengths to compensate for the risk associated with
borrowing.

Subpart C—Mortgage
Requirements
§ 242.25 Mortgage form and disbursement of mortgage proceeds.
(a) Mortgage form. The mortgage shall
be:
(1) Executed on a form approved by
HUD for use in the jurisdiction in
which the property covered by the
mortgage is situated; the form shall
not be changed without the prior written approval of HUD.
(2) Executed by an eligible mortgagor.
(b) Disbursement of mortgage proceeds.
The mortgagee shall be obligated, as a
part of the mortgage transaction, to
disburse the principal amount of the
mortgage to (or for the account of) the
mortgagor or to his or her creditors for
his or her account and with his or her
consent.
§ 242.26 Agreed interest rate.
(a) The mortgage shall bear interest
at the rate or rates agreed upon by the
mortgagee and the mortgagor.
(b) The amount of any increase approved by HUD in the mortgage
amount between initial and final endorsement in excess of the amount that
HUD had committed to insure at initial endorsement shall bear interest at
the rate agreed upon by the mortgagee
and the mortgagor.

PMANGRUM on DSK3VPTVN1PROD with CFR

§ 242.27 Maturity.
The mortgage shall have a maturity
not to exceed 25 years from the date
amortization begins.
§ 242.28 Allowable costs for consultants.
Consulting fees for work essential to
the development of the project may be
included in the insured mortgage. Al-

§ 242.31

lowable consulting fees include those
for analysis of market demand, expected revenues, and costs; site analysis; architectural and engineering design; and such other fees as HUD may
determine to be essential to project development. Fees for work performed
more than 2 years prior to application
are not allowable. Fees for work performed by any party with an identity
of interest with the proposed mortgagor or mortgagee are not allowable.
§ 242.29 Payment requirements.
The mortgage shall provide for payments on the first day of each month
in accordance with an amortization
plan agreed upon by the mortgagor, the
mortgagee, and HUD.
§ 242.30 Application of payments.
All payments to be made by the
mortgagor to the mortgagee shall be
added together and the aggregate
amount thereof shall be paid by the
mortgagor each month in a single payment. The mortgagee shall apply each
payment received to the following
items in the following order:
(a) Premium charges under the contract of mortgage insurance;
(b) Ground rents, taxes, special assessments, and fire and other hazard
insurance premiums;
(c) Interest on the mortgage; and
(d) Amortization of the principal of
the mortgage.
§ 242.31 Accumulation of accruals.
(a) The mortgage shall provide for
payments by the mortgagor to the
mortgagee on each interest payment
date of an amount sufficient to accumulate, in the hands of the mortgagee
one payment period prior to its due
date, the next annual MIP payable by
the mortgagee to HUD. Such payments
shall continue only so long as the contract of insurance shall remain in effect.
(b) The mortgage shall provide for
such equal monthly payments by the
mortgagor to the mortgagee as will
amortize the ground rents, if any, and
the estimated amount of all taxes,
water charges, special assessments, and
fire and other hazard insurance premiums, within a period ending one
month prior to the dates on which the

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§ 242.32

24 CFR Ch. II (4–1–12 Edition)

same become delinquent. The mortgage
shall further provide that such payments shall be held by the mortgagee,
for the purpose of paying such items
before they become delinquent. The
mortgage shall also make provision for
adjustments in case such estimated
amounts shall prove to be more, or
less, than the actual amounts so paid
therefore by the mortgagor. Notwithstanding the foregoing, in particular
circumstances, a mortgagor may purchase required fire and hazard insurance through a consortium of affiliated
institutions or related organizations
or, in the case of public institutions,
through required state purchasing arrangements. In such circumstances,
the mortgage accrual requirement may
be modified to reflect circumstances in
which it is inappropriate for the mortgagee to collect monthly payments and
to make payments on behalf of the
mortgagor.
§ 242.32

Covenant against liens.

The mortgage shall contain a covenant against the creation by the
mortgagor of any liens against the
property, except for such liens as may
be approved by HUD.
§ 242.33 Covenant for malpractice, fire,
and other hazard insurance.
The mortgage shall contain a covenant binding the mortgagor to maintain adequate liability, fire, and extended coverage insurance on the property. The mortgage shall also contain a
covenant binding the mortgagor to
maintain adequate malpractice coverage. All coverage shall be acceptable
to the mortgagee or HUD.
[73 FR 35923, June 25, 2008]

PMANGRUM on DSK3VPTVN1PROD with CFR

§ 242.35

Mortgage lien certifications.

At initial and/or final endorsement of
the mortgage note, each of the following requirements must be met:
(a) The mortgage is the first lien
upon and covers all of the property
used in the operation of the entire hospital;
(b) The property upon which the improvements have been made or constructed and the equipment financed
with mortgage proceeds are free and
clear of all liens other than the insured

mortgage and such other secondary
liens as may be approved by HUD;
(c) The Security Agreement and Uniform Commercial Code filings establish
a first lien on the personalty of the
mortgagor, including but not limited
to equipment acquired with mortgage
proceeds or otherwise not subject to a
prior lien;
(d) The mortgagor has notified HUD
in writing of all unpaid obligations in
connection with the mortgage transaction, the purchase of the mortgaged
property, the construction or substantial rehabilitation of the project, or the
purchase of the equipment financed
with mortgage proceeds.
[72 FR 67546, Nov. 28, 2007, as amended at 73
FR 35923, June 25, 2008]

§ 242.37

Mortgage prepayment.

(a) Prepayment privilege. Except as
provided in paragraph (c) of this section or otherwise established by HUD,
the mortgage shall contain a provision
permitting the mortgagor to prepay
the mortgage in whole or in part upon
any interest payment date, after giving
the mortgagee a 30-day notice in writing in advance of its intention to so
prepay. The 30-day notice may be extended with the prior written approval
of HUD.
(b) Prepayment charge. The mortgage
may contain a provision for such
charge, in the event of prepayment of
principal, as may be agreed upon between the mortgagor and the mortgagee, subject to the following:
(1) The mortgagor shall be permitted
to prepay up to 15 percent of the original principal amount of the mortgage
in any one calendar year without any
such charge.
(2) Any reduction in the original
principal amount of the mortgage resulting from the certification of cost,
which HUD may require, shall not be
construed as a prepayment of the mortgage.
(c) Prepayment of bond-financed or
GNMA-securitized mortgages. Where the
mortgage is given to secure GNMA
mortgage-backed securities or a loan
made by a lender that has obtained the
funds for the loan by the issuance and
sale of bonds or bond anticipation

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Office of Assistant Secretary for Housing, HUD
notes, or both, the mortgage may contain a prepayment restriction and prepayment penalty charge acceptable to
HUD as to term, amount, and conditions.
(d) HUD override of prepayment restrictions. In the event of a default, HUD
may override any lockout, prepayment
penalty, or combination of penalties in
order to facilitate a partial or full refinancing of the mortgaged property and
avoid a claim.
§ 242.38 Late charge.
The mortgage may provide for the
collection by the mortgagee of a late
charge in accordance with terms, conditions, and standards of HUD for each
dollar of each payment to interest or
principal more than 15 days in arrears,
to cover the expense involved in handling
delinquent
payments.
Late
charges shall be separately charged to
and collected from the mortgagor and
shall not be deducted from any aggregate monthly payment.

PMANGRUM on DSK3VPTVN1PROD with CFR

Subpart D—Endorsement for
Insurance
§ 242.39 Insurance endorsement.
Initial endorsement of the mortgage
note shall occur before any mortgage
proceeds are insured, and the time of
final endorsement shall be as set forth
in paragraph (b) of this section.
(a) Initial endorsement. The Commissioner shall indicate the insurance of
the mortgage by endorsing the original
mortgage note and identifying the section of the Act and the regulations
under which the mortgage is insured
and the date of insurance.
(b) Final endorsement. When all advances of mortgage proceeds have been
made and all the terms and conditions
of the commitment have been met to
HUD’s satisfaction, HUD shall indicate
on the original mortgage note the total
of all advances approved for insurance
and again endorse such instrument.
(c) Contract rights and obligations. The
Commissioner and the mortgagee or
lender shall be bound from the date of
initial endorsement by the provisions
of the Contract of Mortgage Insurance
stated in subpart B of part 207, which is
hereby incorporated by reference into
this part.

§ 242.42

§ 242.40 Mortgagee certificate.
At initial endorsement, the mortgagee shall execute a Mortgagee Certificate in a form prescribed by HUD.
§ 242.41 Certification of cost requirements.
Before initial endorsement of the
mortgage for insurance, the mortgagor,
the mortgagee, and HUD shall enter
into an agreement in form and content
satisfactory to HUD for the purpose of
precluding any excess of mortgage proceeds over statutory limitations. Under
this agreement, the mortgagor shall
disclose its relationship with the builder, including any collateral agreement,
and shall agree:
(a) To execute a Certificate of Actual
Costs, upon completion of all physical
improvements on the mortgaged property.
(b) To apply any cost savings in accordance with the provisions below.
§ 242.42 Certificates of actual cost.
(a) The mortgagor’s certificate of actual cost, in a form prescribed by HUD,
shall be submitted upon completion of
the physical improvements to the satisfaction of HUD and before final endorsement, except that in the case of
an existing hospital that does not require substantial rehabilitation and
where the commitment provides for
completion of specified repairs after
endorsement, a supplemental certificate of actual cost will be submitted
covering the completed costs of any
such repairs. The certificate shall show
the actual cost to the mortgagor, after
deduction of any kickbacks, rebates,
trade discounts, or other similar payments to the mortgagor, any of its officers, directors, stockholders, partners,
or other entity member ownership, of
construction and other costs, as prescribed by HUD.
(b) The Certificate of Actual Cost
shall be verified by an independent certified public accountant or independent
public accountant in a manner acceptable to HUD.
(c) Upon HUD’s approval of the mortgagor’s certification of actual cost,
such certification shall be final and incontestable except for fraud or material misrepresentation on the part of
the mortgagor.

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§ 242.43
§ 242.43

24 CFR Ch. II (4–1–12 Edition)
Application of cost savings.

At the sole discretion of HUD, any
cost savings shall be used to:
(a) Reduce the principal amount of
the mortgage and the mortgagor’s cash
equity contribution proportionally, unless the mortgagor elects to have a
greater portion of the savings used to
reduce the mortgage; and/or
(b) Fund any additional construction
or substantial rehabilitation approved
by HUD.

Subpart E—Construction
§ 242.44

Construction standards.

Work designed and performed under
this section shall conform to the standards adopted by HUD, which, at a minimum, shall include the ‘‘Guidelines
for Construction and Equipment of
Hospital and Medical Facilities,’’
which is regularly updated and published by the American Institute of Architects.

PMANGRUM on DSK3VPTVN1PROD with CFR

§ 242.45

Early commencement of work.

(a) Site preparation. Prior to or following the submission of an application, the mortgagor may request for
good cause the commencement of certain limited site preparation for the
project within legal guidelines and
state law. Such work can commence
only after the review of the work and
concurrence by HUD, including the environmental review under 24 CFR
242.79, previous participation review,
and the agreement to certain conditions by the applicant. HUD will not
approve such request until it has completed the environmental review under
24 CFR 242.79. The work must meet all
requirements and guidelines as if it
were approved for mortgage insurance
and is to be accomplished at the sole
risk of the mortgagor.
(b) Construction completed prior to application. Structures completed more
than 2 years prior to application are eligible to be refinanced with insured
mortgage proceeds.
(c) Pre-commitment work. Subsequent
to submission of an application but
prior to the issuance of a commitment
or denial by HUD, the hospital and
lender may request for good cause the
commencement of certain necessary

early site work and limited construction activity in connection with the
improvements, within legal guidelines
and state law. This work must be requested by both the hospital and the
lender to be approved. Such work may
be eligible to be financed with insured
mortgage proceeds if the application is
approved and the work complies with
all specified conditions of HUD as set
forth in a written agreement between
the hospital and HUD. It is understood
that in some cases the application submitted in order for pre-commitment
work to begin may not be complete in
all respects. However, at a minimum,
the application shall include the approved FHA application form, the application fee (based on the amount of
the total proposed insured loan), the
inspection fee (based on the cost of the
pre-commitment work), a project description of the pre-commitment work
and its relation to the total project,
and plans and specifications for the
proposed pre-commitment work in sufficient detail to allow HUD to conduct
its architectural and engineering review and obtain the necessary previous
participation information and evidence
of compliance with federal and state
environmental regulations. Such work
can commence only after the review of
the work and concurrence by the lender and HUD, including previous participation review. HUD will not approve
such request until it has completed the
environmental review under 24 CFR
242.79. The work must meet all requirements and guidelines as if it were approved for mortgage insurance and is
to be accomplished at the sole risk of
the hospital. A request shall be accompanied by documentation required by
HUD. That documentation shall include:
(1) A justification explaining the urgent and compelling circumstances
that make it necessary to begin construction without waiting for the application process to run its course. The
justification must specify the harm the
hospital would suffer from waiting.
(2) A plan detailing how the hospital
will finance the limited construction if
the application for mortgage insurance
is denied.
(3) A statement that financing the
limited construction by means other

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Office of Assistant Secretary for Housing, HUD

PMANGRUM on DSK3VPTVN1PROD with CFR

than a HUD-insured mortgage in the
event the application is denied will impose no significant financial hardship
on the hospital. The statement shall be
accompanied by supporting historical
and projected financial data.
(4) A statement that the hospital recognizes that HUD’s agreement to include the cost of the limited construction in a subsequently approved application does not in any way indicate
that the application will be approved.
(5) A resolution of the governing
body (or, at HUD’s discretion, the executive committee of the governing
body) of the mortgagor attesting to
paragraphs (c)(1) through (4).
(d) Early Start. Subsequent to the
issuance of a commitment, if the hospital and lender request the commencement of the project, the work may
commence after the review and approval of the request by HUD, including the agreement by the hospital and
the lender to any conditions that HUD
may require. Any work undertaken
prior to the initial endorsement shall
be at the sole risk of the hospital.
(e) Prepayment of inspection fee. The
hospital shall pay a non-refundable inspection fee to HUD before the work
described in paragraph (c) or (d) of this
section commences. The fee shall be
based on the amount of the pre-commitment and/or early start work requested to be included in the insured
mortgage loan.
(f) No expressed or implied intent. Approval to proceed under paragraphs (c)
or (d) of this section shall in no way be
construed as indicating any intent, expressed or implied, on the part of HUD
to approve, disapprove, or make any
undertaking or promise whatsoever
with respect to the application or with
respect to any commitment for mortgage insurance. Any work under paragraphs (c) or (d) of this section shall be
undertaken at the sole risk and responsibility of the hospital.
§ 242.46 Insured
advances—building
loan agreement.
Prior to the initial endorsement of
the mortgage for insurance, the mortgagor and mortgagee shall execute a
building loan agreement, approved by
HUD, setting forth the terms and conditions under which progress payments

§ 242.47

may be advanced during construction.
To be covered by mortgage insurance,
or to be included as an eligible cost,
each progress payment involving mortgage proceeds and the owner’s equity
requirement shall be approved by HUD.
§ 242.47 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
that HUD 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
HUD.
(2) Each building component shall be
adequately marked so as to be readily
identifiable in the inventory of the offsite location. Each component 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.

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PMANGRUM on DSK3VPTVN1PROD with CFR

§ 242.48

24 CFR Ch. II (4–1–12 Edition)

(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
HUD 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 HUD.
(2) Before each advance for building
components stored off-site is insured,
the mortgagor’s architect shall certify
to HUD that the components, in their
intended use, comply with HUD-approved contract plans and specifications. Under those circumstances permitted by HUD in which there is no architect, compliance with the HUD-approved contract plans and specifications shall be determined by HUD.
(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
HUD insured, represent more than 50
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
estimated 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 advances for components stored off-site
be made in the absence of a payment
and a performance bond.
(5) No single advance that is to be insured shall be in an amount less than
$10,000.

§ 242.48 Insured advances for certain
equipment and long lead items.
The Commissioner may allow advances for certain pieces of equipment
or other construction materials for
which a manufacturer, fabricator, or
other source requires an interim payment(s) in order to assure the timely
manufacture or fabrication and delivery to the project site. Such advances
can be made only if a bill of sale or an
invoice describes the material or equipment and its completion and delivery
dates in no uncertain terms, and that
such displayed timetable is necessary
to meet the requirements of the overall
construction schedule cited in the construction contract.
§ 242.49 Funds and finances: deposits
and letters of credit.
(a) Deposits. Where HUD requires the
mortgagor to make a deposit of cash or
securities, such deposit shall be with
the mortgagee or a depository acceptable to the mortgagee. Any such deposit shall be held in a separate account for and on behalf of the mortgagor, and shall be the responsibility of
the mortgagee.
(b) Letter of credit. Where the use of a
letter of credit is acceptable to HUD in
lieu of a deposit of cash or securities,
the letter of credit shall be issued to
the mortgagee by a banking institution
acceptable to the lender. The mortgagee shall be responsible to HUD for
collection under the letter of credit. In
the event a demand for payment thereunder is not immediately met, the
mortgagee shall forthwith provide a
cash deposit equivalent to the undrawn
balance of the letter of credit.
(c) Mortgagee not issuer. The mortgagee of record may not be the issuer
of the letter of credit without the prior
written consent of HUD.
§ 242.50 Funds and finances: off-site
utilities and streets.
The Commissioner shall require assurance of completion of off-site public
utilities and streets in all cases, except
where a municipality or other public
body has by agreement acceptable to
HUD agreed to install such utilities
and streets without cost to the mortgagor. Where such assurance is required, it shall be in the form of a cash

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Office of Assistant Secretary for Housing, HUD
escrow deposit, a letter of credit, the
retention of a specified amount of
mortgage proceeds by the mortgagee,
or a combination thereof. In any case,
the amount of deposit or retained cash
(or both) must be sufficient to cover
the cost of off-site utilities and streets.
If a cash escrow is used, it shall be deposited with the mortgagee or with an
acceptable trustee or escrow agent designated by the mortgagee. If mortgage
proceeds are used, the mortgagee shall
retain under terms approved by HUD,
rather than disburse at the initial closing of the mortgage, a sufficient portion of the mortgage proceeds allocated to land in the project analysis.
As additional assurance, HUD may also
require a surety company bond or
bonds.
[72 FR 67546, Nov. 28, 2007, as amended at 73
FR 35923, June 25, 2008]

PMANGRUM on DSK3VPTVN1PROD with CFR

§ 242.51 Funds and finances: Insured
advances and assurance of completion.
(a) Where the estimated cost of construction or substantial rehabilitation
is more than $500,000, the mortgagor
shall furnish assurance of completion
in the form of corporate surety bonds
for payment and performance, each in
the minimum amount of 100 percent of
the construction contract (or Guaranteed Maximum Price, in the case of
construction management) and each
satisfactory to HUD.
(b) All types of assurance of completion shall be on forms approved by
HUD. All surety companies executing a
bond and all parties executing a personal indemnity agreement must be
satisfactory to HUD.
(c) A mortgagee may prescribe more
stringent requirements for assurance of
completion than the minimum requirements provided for in this section.
§ 242.52 Construction contracts.
(a) Awarding of contract. A contract
for the construction or substantial rehabilitation of a hospital shall be entered into by a mortgagor, with a
builder selected by a competitive bidding procedure acceptable to HUD.
(b) Form of contract. The construction
contract shall be: A lump sum form
providing for payment of a specified
amount; a construction management

§ 242.53

contract with a guaranteed maximum
price, the final costs of which are subject to a certification acceptable to
HUD; a design-build contract with
terms and certification requirements
acceptable to HUD; or such other form
of contract as may be acceptable to
HUD.
(c) Competitive bidding. A competitive
bidding procedure acceptable to HUD
must be used in the selection of bidders
to perform work or otherwise provide
service to the project, the costs of
which are included in any form of construction contract cited in paragraph
(b) of this section. Fixed equipment not
included in the construction contract,
and movable equipment, may be purchased by securing quotations or by
using competitive bidding procedures.
[72 FR 67546, Nov. 28, 2007, as amended at 73
FR 35923, June 25, 2008]

§ 242.53

Excluded contractors.

(a) Contracts relating to the construction of the project shall not be
made with any person or entity that
has been excluded from participation
in federal programs, including but not
limited to: A general contractor, a subcontractor, or construction manager
(or any firm, corporation, partnership,
or association in which such contractor, subcontractor, or construction
manager has a substantial interest).
Before entering into contracts with
any such person or entity, owners must
consult the government-wide list of excluded parties, and any list of excluded
parties maintained by HUD.
(b) Contracts relating to the construction of the project shall not be
made with a general contractor that
has an identity of interest, as defined
by HUD, with the mortgagor or mortgagee.
(c) If HUD determines that a contract
has been made contrary to the requirements of paragraphs (a) or (b) of this
section and so notifies the mortgagee,
HUD will require the contractor or
construction manager to cost-certify
and may require other remedial action
in addition to taking enforcement action, as HUD deems appropriate.

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§ 242.54

24 CFR Ch. II (4–1–12 Edition)

Subpart F—Nondiscrimination and
Wage Rates

PMANGRUM on DSK3VPTVN1PROD with CFR

§ 242.54 Nondiscrimination.
Hospital facilities financed with
mortgages insured under this part
must be made available without discrimination as to race, color, religion,
sex, age, disability, or national origin.
Hospitals must be operated in compliance with all applicable civil rights
laws and regulations, including 24 CFR
part 200, subpart J (Equal Employment
Opportunity), and the Americans with
Disabilities Act (42 U.S.C. 12101 et seq.).
Racially restrictive covenants are per
se illegal and their use is prohibited.
The aforesaid provisions regarding age
and sex discrimination do not affect
the eligibility of hospitals for women
and children.
§ 242.55 Labor standards.
(a) Projects financed under this part
(except under 24 CFR 242.91) must comply with the prevailing wage rates determined under the Davis-Bacon Act
(40 U.S.C. 3141 et seq.), and U.S. Department of Labor regulations in 29 CFR
parts 1, 3, and 5 for compliance with
labor standards laws, in accordance
with section 212 of the Act, provided
that supplemental loans under section
241 of the Act made in connection with
loans insured under this part are subject to labor standards requirements in
the same manner and to the same extent as mortgages insured under section 242 of the National Housing Act.
(b) The requirements stated in 24
CFR part 70 governing HUD waiver of
Davis-Bacon prevailing wage rates for
volunteers apply to hospitals with
mortgages insured under this part.
(c) Each laborer or mechanic employed on any facility covered by a
mortgage insured under this part (except under 24 CFR 242.91, but including
a supplemental loan under section 241
of the National Housing Act made in
connection with a loan insured under
this part) shall receive compensation
at a rate not less than 1.5 times the
basic rate of pay for all hours worked
in any workweek in excess of 8 hours in
any workday or 40 hours in the workweek.
(d) Project commitments, contracts,
and agreements, as determined by

HUD, and construction contracts and
subcontracts, shall include terms, conditions, and standards for compliance
with applicable requirements set forth
in 29 CFR parts 1, 3, and 5 and section
212 of the Act.
(e) No advance under a loan or mortgage that is subject to the requirements of section 212 shall be eligible
for insurance unless there is filed with
the application for the advance a certificate as required by HUD certifying
that the laborers and mechanics employed in construction of the project
have been paid not less than the wage
rates required under section 212.

Subpart G—Regulatory Agreement, Accounting and Reporting, and Financial Requirements
§ 242.56

Form of regulation.

As long as HUD is the insurer or
holder of the mortgage, all mortgagors
shall be regulated by HUD through the
use of a regulatory agreement in a published format determined by HUD and
such additional covenants and restrictions as may be determined necessary
by HUD on a case-by-case basis. In addition, all mortgagors shall be subject
to the provisions of 24 CFR part 24 and
such other enforcement provisions as
may be applicable. The mortgagor
shall be subject to monitoring by HUD
and its agents and contractors, on an
ongoing basis for the life of the insured
mortgage to ensure against the risk of
default, and the mortgagor must make
its financial records available to HUD
and its agents and contractors upon request. In those cases in which the hospital facility is leased as permitted by
§ 242.72, the provisions of this section
also shall apply to the lessee.
[72 FR 67546, Nov. 28, 2007, as amended at 73
FR 35923, June 25, 2008]

§ 242.57
ity.

Maintenance of hospital facil-

The mortgagor shall maintain the
hospital’s grounds, buildings, and the
equipment financed with mortgage proceeds in good repair, and shall promptly complete such repairs and maintenance as HUD considers necessary.

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Office of Assistant Secretary for Housing, HUD
§ 242.58 Books, accounts, and financial
statements.
(a) Books and accounts. The mortgagor’s books and accounts relating to
the operation of the physical facilities
of the hospital shall be established in a
manner satisfactory to HUD, and shall
be kept in accordance with the requirements of HUD as long as the mortgage
is insured or held by HUD.
(b) Financial reports. The mortgagor
shall file with HUD:
(i) Annual audited financial statements in accordance with the guidance
below;
(ii) Quarterly unaudited financial reports, within 40 days following the end
of each quarter of the mortgagor’s fiscal year;
(iii) If requested by HUD, monthly financial reports within 40 days following the end of each month;
(iv) Board-certified annual financial
results within 120 days following the
close of the fiscal year (if the annual
audited financial statement has not
yet been filed with HUD) and at such
other times as HUD may designate on a
case-by-case basis; and
(v) Such other financial and utilization reports as HUD may require.
(c) Audits. (1) Not-for-profit and state
and local governments shall conduct
audits in accordance with the Consolidated Audit Guide for Audits of HUD
Programs (Handbook 2000.04) and OMB
Circular A–133 (Audits of states, local
governments, and nonprofit organizations).
(2) For-profit organizations shall conduct audits in accordance with the
Consolidated Audit Guide for Audits of
HUD Programs (Handbook 2000.04).
(d) Changes in accounting policies. The
annual audited financial statements
shall identify any changes in accounting policies and their financial effect
on the balance sheet and on the income
statement.
(e) Compliance reporting. The mortgagor shall instruct the auditor of the
annual financial statement to include
in its report an evaluation of the mortgagor’s compliance with the Regulatory Agreement.
(f) Books of management agents. The
books and records of management
agents, lessees, operators, managers,
and affiliates, as they pertain to the

§ 242.61

operations of the hospital, shall be
maintained in accordance with Generally Accepted Accounting Principles
(GAAP) or Governmental Accounting
Standards and shall be open and available to inspection by HUD, after reasonable prior notice, during normal office hours, at the hospital or other mutually agreeable location. Every contract executed on behalf of the hospital
with any of the aforesaid parties shall
include the provision that the books
and records of such entities shall be
properly maintained and open to inspection during normal business hours
by HUD at the hospital or other mutually agreeable location.
(g) Medicare cost reports. Upon request, the mortgagor shall provide to
HUD a copy of the Medicare Cost Report most recently submitted to the
Centers for Medicare and Medicaid
Services (an agency of the Department
of Health and Human Services), along
with related financial documents.
(h) In those cases in which the hospital facility is leased as permitted by
§ 242.72, the requirements pertaining to
the mortgagor in § 242.58 (a) through (g)
also shall pertain to the lessee.
[72 FR 67546, Nov. 28, 2007, as amended at 73
FR 35923, June 25, 2008]

§ 242.59 Inspection
Commissioner.

of

facilities

The mortgaged property (including
buildings and equipment) and the
books, records, and documents relating
to the operation of the physical facilities of the hospital shall be subject to
inspection and examination by HUD or
its authorized representative at all reasonable times.
§ 242.61

Management.

The mortgagor shall provide for management of the hospital in a manner
satisfactory to HUD.
(a) Contract Management of Hospital.
The mortgagor shall not execute a
management agreement or any other
contract for management of the hospital without HUD’s prior written approval. (Management of the hospital,
which requires HUD’s prior written approval, refers to management of the
hospital not management of components within the hospital such as the

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§ 242.62

24 CFR Ch. II (4–1–12 Edition)

hospital cafeteria or hospital pharmacy.) Any management agreement or
contract for management of the hospital shall contain a provision that it
shall be subject to termination without
penalty and with or without cause,
upon written request by HUD addressed
to the mortgagor and management
agent.
(b) Principals. HUD shall have the authority to require that any principals
of the mortgagor, including but not
limited to board members of a corporate entity, be removed, substituted,
or terminated for cause upon written
request by HUD addressed to the mortgagor.
(c) Employees. HUD shall have the authority to require that any key management employees of the mortgagor
(as defined and determined solely by
HUD) be terminated for cause upon
written request by HUD addressed to
the mortgagor.
(d) Procedures upon receipt of request
under paragraphs (a) through (c) of this
section. Upon receipt of such requests
under paragraphs (a) through (c) of this
section, the mortgagor shall immediately terminate said management
agreement, principals, or employees
within the shortest applicable period
HUD determines appropriate and shall
make arrangements satisfactory to
HUD for ongoing proper management
of the hospital.
[72 FR 67546, Nov. 28, 2007, as amended at 73
FR 35923, June 25, 2008]

PMANGRUM on DSK3VPTVN1PROD with CFR

§ 242.62 Releases of lien.
The mortgagor shall not sell, dispose
of, transfer, or permit to be encumbered any security property without
the prior approval of the lender and
Commissioner, subject to thresholds or
such other standards as HUD may establish for the approval requirement.
Where there is a partial release of lien,
the lender must make a determination,
subject to prior review and approval by
HUD, that the remaining or replacement property subject to the first lien
provides adequate security for the remaining principal indebtedness.
§ 242.63 Additional indebtedness and
leasing.
The mortgagor shall not enter into
any long-term debt, short-term debt

(including receivables or line of credit
financing), equipment leases, or derivative-type transactions, except in conformance with policies and procedures
established by HUD.
§ 242.64

Current and future property.

All current or future property (including personalty) of the mortgagor
on or off mortgaged real estate (except
that specifically restricted by donors
or specifically excluded by HUD) will
be considered as part of the HUD-insured hospital and subject to all provisions of the HUD regulatory agreement. All equipment acquired by the
hospital following initial endorsement
and at any time during the term of the
loan shall become subject to the lien of
the security agreement and any Uniform Commercial Code Financing
Statements filed pursuant to the security agreement, unless the mortgagor
specifically requests and HUD, for good
cause, approves subordination of the
lien of the insured mortgagee on specific personalty for specific periods of
time. The first lien on the realty (as
defined in the regulatory agreement
and as identified in the security instrument) cannot be subordinated in whole
or in part.
§ 242.65

Distribution of assets.

The Commissioner shall establish financial thresholds and procedures for
the distribution of surplus cash and
other assets. Surplus cash that meets
the definition in 24 CFR 242.1, or cash
that has been expressly approved for
distribution by HUD, may be distributed to other organizations formally
affiliated with the mortgagor, a parent
organization with which the mortgagor
is also affiliated, partners, or stockholders, in accordance with those financial thresholds and procedures set
forth in the regulatory agreement.
Other assets may be distributed to
other organizations formally affiliated
with the mortgagor, a parent organization with which the mortgagor is also
affiliated, partners, or stockholders, in
accordance with those financial thresholds and procedures set forth in the
regulatory agreement, and in accordance with the release of lien conditions
in 24 CFR 242.62, if applicable.

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Office of Assistant Secretary for Housing, HUD
§ 242.66

Affiliate transactions.

Transactions with affiliates that are
arms-length are permitted as specified
in the Regulatory Agreement. Transactions with affiliates that are not
arms-length are not permitted except
with the prior written approval of
HUD.
§ 242.67 New corporations, subsidiaries, affiliations, and mergers.
The mortgagor shall not establish,
develop, organize, acquire, become the
sole member of, or acquire an interest
sufficient to require disclosure on the
audited financial statements of the
mortgagor, in any corporation, subsidiary, or affiliate organization other
than those with which the mortgagor
was affiliated as of date of application,
without the prior approval of HUD. The
mortgagor shall obtain HUD’s written
approval for all future mergers.

Subpart H—Miscellaneous
Requirements
§ 242.68 Disclosure and verification of
Social Security and Employer Identification Numbers.
The requirements set forth in 24 CFR
part 5, regarding the disclosure and
verification of Social Security Numbers and Employer Identification Numbers, and Employer Identification
Numbers by ‘‘applicants for and participants in’’ assisted mortgage and
loan insurance and related programs,
apply to this program.
§ 242.69

Transfer fee.

Upon application for review of a
transfer of physical assets or the substitution of mortgagors, a transfer fee
of 50 cents per thousand dollars of the
outstanding principal balance of the
mortgage shall be paid to HUD. A
transfer fee is not required if both parties to the transfer transaction are
not-for-profit or public organizations.

PMANGRUM on DSK3VPTVN1PROD with CFR

§ 242.70

Fees not required.

The payment of an application, commitment, inspection, or reopening fee
shall not be required in connection
with the insurance of a mortgage involving the sale by the Secretary of

§ 242.76

any property acquired under any section or title of the Act.
§ 242.72 Leasing of hospital.
Leasing of a hospital in its entirety
is prohibited. Notwithstanding this
prohibition, any proposal in which
leasing of the entire facility is a factor
due to state law prohibitions against
the mortgaging of health care facilities
by state entities shall be considered on
a case-by-case basis. Also, leasing of a
hospital that has an existing Section
242-insured loan is permitted if HUD
determines that leasing is necessary to
reduce the risk of default by a financially troubled hospital.
§ 242.73 Waiver of eligibility requirements for mortgage insurance.
The Secretary may insure under this
part, without regard to any limitation
upon eligibility contained in this subpart, any mortgage assigned to him or
her in connection with payment under
a contract of mortgage insurance, or
executed in connection with a sale by
him or her of any property previously
insured under this part and acquired
subsequent to a claim.
§ 242.74 Smoke detectors.
Each occupied room must include
such smoke detectors as are required
by law.
§ 242.75 Title requirements.
In order for the mortgaged property
to be eligible for insurance, HUD shall
determine that marketable title thereto is vested in the mortgagor as of the
date the mortgage is filed for record.
The title evidence shall be examined by
HUD and the endorsement of the mortgage note for insurance shall be evidence of its acceptability.
§ 242.76 Title evidence.
Upon insurance of the mortgage, the
mortgagee shall furnish to HUD a survey of the mortgage property, satisfactory to HUD, and a policy of title insurance covering the property, as provided in paragraph (a) of this section.
If, for reasons HUD considers to be satisfactory, title insurance cannot be furnished, the mortgagee shall furnish
such evidence of title in accordance
with paragraph (b) or (c) of this section

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§ 242.77

24 CFR Ch. II (4–1–12 Edition)

as HUD may require. Any survey, policy of title insurance, or evidence of
title required under this section shall
be furnished without expense to HUD.
The types of title evidence are:
(a) A policy of title insurance issued
by a company and in a form satisfactory to HUD. The policy shall name as
the insureds the mortgagee and the
Secretary of Housing and Urban Development, and their successors and assigns, as their respective interests may
appear. The policy shall provide that
upon acquisition of title by the mortgagee or the Secretary, it will continue
to provide the same coverage as the
original policy, and will run to the
mortgagee or the Secretary, as the
case may be.
(b) An abstract of title satisfactory
to HUD, prepared by an abstract company or individual engaged in the business of preparing abstracts of title, accompanied by a legal opinion satisfactory to HUD as to the quality of such
title, signed by an attorney-at-law experienced in the examination of titles.
(c) A Torrens or similar title certificate.

PMANGRUM on DSK3VPTVN1PROD with CFR

§ 242.77

Liens.

The hospital must be free and clear
of all liens other than the insured
mortgage, except that the property
may be subject to a lien as provided by
terms and conditions established by
HUD, as follows:
(a) An inferior lien made or held by a
federal, state, or local government instrumentality;
(b) An inferior lien required in connection with a supplemental loan insured pursuant to section 241 of the
Act;
(c) An inferior or superior lien on
equipment as may be approved in connection with an equipment leasing program approved by HUD;
(d) An inferior or superior lien on accounts receivable as approved by HUD
as collateral for a line of credit or
other borrowing by a hospital insured
under this part that has extraordinary
needs such as cash flow difficulties; or
(e) Similar liens otherwise approved
by HUD.

§ 242.78 Zoning, deed, and building restrictions.
The project when completed shall not
violate any material zoning or deed restrictions applicable to the project
site, and shall comply with all applicable building and other governmental
codes, ordinances, regulations, and requirements.
§ 242.79 Environmental quality determinations and standards.
Requirements set forth in 24 CFR
part 50, ‘‘Protection and Enhancement
of Environmental Quality,’’ 24 CFR
part 51, ‘‘Environmental Criteria and
Standards,’’ and 24 CFR part 55,
‘‘Floodplain Management,’’ governing
environmental review responsibilities
(as applicable) and any additional environmental standards, reviews, or determinations required by HUD apply to
this program.
§ 242.81 Lead-based paint poisoning
prevention.
Requirements set forth in 24 CFR
part 35 apply to this program.
§ 242.82 Energy conservation.
Construction, mechanical equipment,
and energy and metering selections
shall provide cost-effective energy conservation in accordance with standards
established by HUD.
§ 242.83 Debarment and suspension.
The requirements set forth in 24 CFR
part 24 apply to this program.
§ 242.84 Previous participation and
compliance requirements.
The requirements set forth in 24 CFR
part 200, subpart H, apply to this program.
§ 242.86 Property and mortgage assessment.
The requirements set forth in 24 CFR
part 200, subpart E, regarding the mortgagor’s responsibility for making those
investigations, analysis, and inspections it deems necessary for protecting
its interests in the property apply to
these programs.
§ 242.87 Certifications.
Any agreement, undertaking, statement, or certification required by HUD

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Office of Assistant Secretary for Housing, HUD
shall specifically state that it has been
made, presented, and delivered for the
purpose of influencing an official action of the FHA, and of HUD, and may
be relied upon by HUD as a true statement of the facts contained therein.
§ 242.89

Supplemental loans.

A loan, advance of credit, or purchase
of an obligation representing a loan or
advance of credit made for the purpose
of financing improvements or additions
(including the refinancing of any indebtedness incurred in connection with
the early commencement of work on
such improvements or additions, subject to the requirements of §§ 242.15 and
242.45) to a hospital covered by a mortgage insured under this section of the
Act or for a Commissioner-held mortgage, or equipment for a hospital, may
be insured pursuant to the provisions
of section 241 of the Act and under the
provisions of this part as applicable
and such additional terms and conditions as established by HUD. See subpart B of 24 CFR part 241 with respect
to the contract of mortgage insurance
for all loans insured under section 241
of the Act. See 24 CFR part 241, subpart
C, for energy improvements.

PMANGRUM on DSK3VPTVN1PROD with CFR

§ 242.90 Eligibility of mortgages covering hospitals in certain neighborhoods.
(a) A mortgage financing the repair,
substantial rehabilitation, or construction of a hospital located in an older
declining urban area shall be eligible
for insurance under this subpart, subject to compliance with the additional
requirements of this section.
(b) The mortgage shall meet all of
the requirements of this subpart, except such requirements (other than
those relating to labor standards and
prevailing wages or environmental review) as are judged to be not applicable
on the basis of the following determinations to be made by HUD.
(1) That the conditions of the area in
which the property is located prevent
the application of certain eligibility requirements of this subpart.
(2) That the area is reasonably viable, and there is a need in the area for
an adequate hospital to serve low and
moderate income families.

§ 242.91

(3) That the mortgage to be insured
is an acceptable risk.
(c) Mortgages complying with the requirements of this section shall be insured under this subpart pursuant to
section 223(e) of the National Housing
Act. Such mortgages shall be insured
under and be the obligation of the Special Risk Insurance Fund.
[72 FR 67546, Nov. 28, 2007, as amended at 73
FR 35923, June 25, 2008]

§ 242.91 Eligibility
transactions.

of

refinancing

A mortgage given to refinance an existing insured mortgage under section
241 or Section 242 of the Act covering a
hospital may be insured under this subpart pursuant to section 223(a)(7) of the
Act. Insurance of the new, refinancing
mortgage shall be subject to the following limitations:
(a) Principal amount. The principal
amount of the refinancing mortgage
shall not exceed the lesser of:
(1) The original principal amount of
the existing insured mortgage, or
(2) The unpaid principal amount of
the existing insured mortgage, to
which may be added loan closing
charges associated with the refinancing
mortgage, and costs, as determined by
HUD, of improvements, upgrading, or
additions required to be made to the
property.
(b) Debt service rate. The monthly
debt service payment for the refinancing mortgage may not exceed the
debt service payment charged for the
existing mortgage.
(c) Mortgage term. The term of the
new mortgage shall not exceed the unexpired term of the existing mortgage,
except that the new mortgage may
have a term of not more than 12 years
in excess of the unexpired term of the
existing mortgage in any case in which
HUD determines that the insurance of
the mortgage for an additional term
will inure to the benefit of the FHA Insurance Fund, taking into consideration the outstanding insurance liability under the existing insured mortgage, and the remaining economic life
of the property.
(d) Minimum loan amount. The mortgagee may not require a minimum
principal amount to be outstanding on

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§ 242.92

24 CFR Ch. II (4–1–12 Edition)

the loan secured by the existing mortgage.
§ 242.92 Minimum
amount.

principal

loan

A mortgagee may not require, as a
condition of providing a loan secured
by a mortgage insured under this part,
that the principal amount of the mortgage exceed a minimum amount established by the mortgagee.
§ 242.93

Amendment of regulations.

The regulations in this subpart may
be amended by HUD at any time and
from time to time, in whole or in part,
but such amendment shall not adversely affect the interests of a mortgagee or lender under the insurance on
any mortgage or loan already insured,
and shall not adversely affect the interests of a mortgagee or lender on any
mortgage or loan to be insured on
which HUD has issued a commitment
to insure.

PART 244—MORTGAGE INSURANCE FOR GROUP PRACTICE FACILITIES [TITLE XI]
Subpart A—Eligibility Requirements
Sec.
244.1
244.2

Eligibility requirements.
License.

Subpart B—Contract Rights and
Obligations
§ 244.251 Cross-reference.
(a) All of the provisions, except
§ 207.258b, of part 207, subpart B of this
chapter relating to mortgages insured
under section 207 of the National Housing Act apply to a mortgage covering a
group practice facility insured under
title XI of the National Housing Act.
(b) For the purposes of this subpart
all references in part 207 of this chapter
to section 207 of the Act shall be construed to refer to title XI of the Act.
(c) All of the definitions in § 244.1
shall apply to this subpart. In addition
as used in this part, the term contract
of insurance means the agreement evidenced by the Commissioner’s insurance endorsement and includes the provisions of this subpart and of the Act.
[36 FR 24663, Dec. 22, 1971, as amended at 50
FR 38787, Sept. 25, 1985]

Subpart B—Contract Rights and
Obligations
244.251

§ 244.2 License.
The Commissioner shall not insure
any mortgage under this part unless
the appropriate licensing agency for
the State, municipality or other political subdivision in which a project is or
is to be located provides such assurances as the Commissioner considers
necessary that the facility will comply
with any applicable State or local
standards and requirements for such
facilities.

Cross-reference.

AUTHORITY: 12 U.S.C. 1715b, 1749aaa–5); 42
U.S.C. 3535(d).

PART 245—TENANT PARTICIPATION
IN
MULTIFAMILY
HOUSING
PROJECTS

SOURCE: 36 FR 24663, Dec. 22, 1971, unless
otherwise noted.
Sec.
245.5
245.10
245.15

Subpart A—Eligibility
Requirements
SOURCE: 61 FR 14407, Apr. 1, 1996, unless
otherwise noted.

PMANGRUM on DSK3VPTVN1PROD with CFR

§ 244.1

Subpart A—General Provisions

Eligibility requirements.

The requirements set forth in 24 CFR
part 200, subpart A, apply to group
practice facilities (title XI) of the National Housing Act (12 U.S.C. 1749aaa),
as amended.

Purpose.
Applicability of part.
Notice to tenants.

Subpart B—Tenant Organizations
245.100 Right of tenants to organize.
245.105 Recognition of tenant organizations.
245.110 Legitimate tenant organizations.
245.115 Protected activities.
245.120 Meeting space.
245.125 Tenant organizers.
245.130 Tenants’ rights not to be re-canvassed.
245.135 Enforcement.

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